Return to CHAPTER 80

80.20
Generally Accepted Accounting Principles

80.20.10
July 1, 2001

This state adopts Generally Accepted Accounting Principles (GAAP)
 

Generally accepted accounting principles (GAAP) are uniform minimum standards of and guidelines to financial accounting and reporting. GAAP establishes appropriate measurement and classification criteria for financial reporting. Adherence to GAAP provides a reasonable degree of comparability among the financial reports of state and local governmental units. In accordance with RCW 43.88.037), the Office of Financial Management (OFM) adopts GAAP as applicable to state governments.

80.20.20
July 1, 2001

What constitutes GAAP?
 

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:
 
  1. 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. 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.

  3. AICPA Accounting Standards Executive Committee (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.

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

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

80.20.30
July 1, 2001

Governmental GAAP requires fund accounting

 

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 separate funds, each of which is a fiscal and accounting entity with a self-balancing set of accounts.

80.20.35
July 1, 2001

Fund categories used in governmental accounting

 

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.

80.20.35.a

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

General Fund - is used to account for all financial resources of the state not required to be accounted for in some other fund.

Special Revenue Funds - are used to account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditure for specified purposes.

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 major capital facilities (other than those financed by proprietary funds or in trust funds for individuals, private organizations, or other governments).

Permanent Funds - are used to account for resources that are legally restricted to the extent that only earnings, and not principal, may be used for the benefit of the state or its citizenry.

80.20.35.b

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 any activity for which a fee is charged to external users for goods or services. Activities are required to be reported as enterprise funds, in the context of the activity's principal revenue sources, if any one of the following criteria is met:

a) The activity is financed with debt that is secured solely by pledge of the net revenues from fees and charges of the activity,
b) Laws or regulations require that the activity's costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues, or
c) The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service).

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 state, or to other governmental units, on a cost-reimbursement basis. Internal service funds should only be used if the state is the predominant participant in the activity.

80.20.35.c

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, and/or other governmental units. There are four types of fiduciary funds:

Pension (and other employee benefit) Trust Funds - are used to report resources that are required to be held in trust by the state for the members and beneficiaries of defined benefit pension plans, defined contribution pension plans, and other employee benefit plans.

Investment Trust Funds - are used to report the external portion of the Local Government Investment Pool, which is reported, by the state as the sponsoring government.

Private-Purpose Trust Funds - are used to report trust arrangements, other than pension and investment trusts, under which principal and income benefit individuals, private organizations, or other governments.

Agency Funds - are used to account for resources held by the state in a purely custodial capacity for other governments, private organizations or individuals.

80.20.40
July 1, 2001

Financial Reporting Requirements

80.20.40.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.

80.20.40.b

Comprehensive Annual Financial Report - A comprehensive annual financial report (CAFR) should be prepared covering all activities of the primary government and providing an overview of its discretely presented component units. It should contain the following sections:

1. Introductory Section, which includes the table of contents and letter of transmittal.

2. Financial Section, which includes:
  • the independent auditor's report;
  • management's discussion and analysis (MD&A), (refer also to Subsection 80.20.80);
  • basic financial statements
  • required supplementary information (RSI) other than MD&A; and
  • combining and individual fund statements and schedules.
3. Statistical Section.

80.20.45
July 1, 2001

What is the financial reporting entity?

The financial reporting entity of the state consists of:

  1. The primary government.

    The primary government consists of all funds, agencies, departments, and organizations that make up the legal entity of the state.

  2. Organizations for which the primary government is financially accountable.

    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.

  3. Other stand-alone organizations (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.

80.20.50
July 1, 2001

Measurement focus and basis of accounting

80.20.50.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:
 
  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. 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.

80.20.50.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.
 
  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. 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. Revenues are considered measurable when they are reasonably estimable. Expenditures are generally recognized when the fund liability is incurred, if measurable.

80.20.50.c

Under generally accepted accounting principles, the measurement focus and basis of accounting applied varies with fund type category.
 
  1. Governmental funds focus primarily on the sources, uses and balance of current financial resources and often have a budgetary orientation. They 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. Proprietary funds focus on the determination of net income, the changes in net assets (or cost recovery), financial position, and cash flows. They 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.
    • 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.

  3. Fiduciary funds focus on net assets and changes in net assets. Trust funds use the flow of economic resources measurement focus and the accrual basis of accounting, except for the recognition of certain liabilities of defined benefit pension plans. Agency funds also use the accrual basis of accounting, but, since they are custodial in nature and do not involve the measurement of results of operations, they do not use a measurement focus.

 

80.20.60
July 1, 2001

Accounting for capital assets and long-term obligations

80.20.60.a

Capital assets of the state are accounted for at cost or, if the cost is not practicably determinable, at estimated cost. The cost of a capital 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 capital assets are recorded at their estimated fair value at the time received. Refer to Chapter 30 for the state's policy for capitalizing assets and for estimating the useful lives of those assets.

Due to the distinctive nature of governmental activities and fund accounting requirements, some capital assets are accounted for in proprietary and fiduciary funds while others are accounted for in the General Capital Assets Subsidiary Account.

80.20.60.a.(1)

Capital assets used in proprietary and fiduciary funds, where the flow of economic resources is measured, are accounted for in the appropriate fund.

Depreciation of capital assets accounted for in a proprietary or fiduciary fund is recorded in the accounting records of that fund.

Proprietary funds report capital assets both in the government-wide and fund financial statements. Capital assets of fiduciary funds are reported only in the statement of fiduciary net assets.

80.20.60.a.(2)

General capital assets are capital assets used in the operations of governmental funds where the primary accounting purpose is to reflect the sources and uses of current financial resources. Since general capital assets do not represent financial resources available for expenditure, they should not be reported as assets in governmental funds but should be reported in the governmental activities column in the government-wide statement of net assets.

80.20.60.a.(3)

Capital assets should be depreciated over their estimated useful lives unless they are either inexhaustible or are infrastructure assets using the modified approach. Depreciation expense should be reported in:

  • the government-wide statement of activities,
  • the proprietary fund statement of revenues, expenditures, and changes in fund net assets, and
  • the statement of changes in fiduciary net assets.

80.20.60.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 the General Long-Term Obligations Subsidiary Account.

80.20.60.b.(1)

Long-term obligations associated with and expected to be paid from proprietary and fiduciary funds are accounted for in the appropriate fund. These obligations may be secured by a specific fund asset or revenue or may be backed by the full faith and credit of the state.

Proprietary funds should report long-term obligations both in the government-wide and fund financial statements. Long-term obligations of fiduciary funds are reported only in the statement of fiduciary net assets.

80.20.60.b.(2)

All long-term obligations that are not accounted for in a proprietary or fiduciary fund are considered general obligations of the state. Since 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, they should not be reported in governmental funds but should be reported in the governmental activities column in the government-wide statement of net assets.

80.20.70
July 1, 2001

GAAP budgetary requirements

Budgeting is recognized in GAAP as being 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, and
  • Budgetary comparisons should be included in the appropriate financial statements and schedules for governmental funds for which budgets have been adopted. The budgetary comparison should present both the original and the final appropriated budgets for the period as well as actual inflows, outflows, and balances, stated on the state's budgetary basis.

Governmental funds of the state are budgeted materially in accordance with GAAP. The required budgetary comparisons are presented as required supplementary information.

80.20.80
July 1, 2001

Management's Discussion and Analysis

The state's financial statements are preceded by a Management's Discussion and Analysis (MD&A). The MD&A, which is classified as required supplementary information, is a narrative introduction, overview, and analysis of the state's financial statements. It focuses on the primary government and is objective, easily readable, and based on currently known facts and conditions.


The MD&A introduces the basic financial statements describing the statements and their relationship to one another. With emphasis on the current year, it presents condensed comparative data and an analysis of the overall financial position of the state as well as an analysis of significant balances and operations of individual funds. The MD&A presents budget variances, significant capital asset (including infrastructure) and debt activity, and other potentially significant matters.

80.20.82
July 1, 2001

Government-wide financial statements

 

The state presents two basic government-wide financial statements: the Statement of Net Assets and the Statement of Activities. These statements are prepared using the economic resources measurement focus and the accrual basis of accounting.

The government-wide financial statements present information about the overall state. All governmental and business-type activities are included, but fiduciary activities are excluded. Nonfiduciary component units are included.

80.20.82.a

Statement of Net Assets - The purpose of the Statement of Net Assets is to display the financial position of the primary government and its component units. Governmental and business-type activities of the primary government are displayed in separate columns with a total column presenting a consolidated total (balances between governmental and business-type activities are eliminated).

Assets and liabilities are presented in a net assets format in order of liquidity. Net assets are classified into three categories: 1) invested in capital assets, net of related debt; 2) restricted net assets; and 3) unrestricted net assets. Net assets are reported as restricted when constraints are placed on asset use either externally, by creditors, grantors, contributors, or imposed by law through constitutional provision or enabling legislation.

80.20.82.b

Statement of Activities - The purpose of a statewide Statement of Activities is to identify the extent to which each major state program is supported by general state revenues or is self-financed through fees and intergovernmental aid. For governmental activities, a major program is defined as a function. For business type activities, a major program is an identifiable activity.

80.20.85
July 1, 2001

Fund Financial Statements

80.20.85.a

The fund financial statements focus on major individual funds of the state with non major funds aggregated into a single column. In conjunction with the fund statements, the state presents a summary reconciliation between the fund financial statements and the government-wide financial statements.

At the fund statement level, governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting. Proprietary funds use the economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are reported consistent with proprietary funds except for the recognition of certain liabilities of defined benefit pension plans.

80.20.85.b

The state's fund financial statements include:

Governmental funds

  • Balance Sheet
  • Statement of Revenues, Expenditures, and Changes in Fund Balances

Proprietary funds

  • Statement of Net Assets
  • Statement of Revenues, Expenses, and Changes in Fund Net Assets
  • Statement of Cash Flows (direct method)

Fiduciary funds

  • Statement of Fiduciary Net Assets
  • Statement of Changes in Fiduciary Net Assets
Click here if you would like to print a Word Version of this document.
Return to CHAPTER 80