Loading...
Enterprise Fundsinvest.nent Income Depreciation Expense Interfund Transfers Activities That Are Exclusively Business -Type Activities Interest Expense Investment Income Depreciation Expense Interfund Transfers Activities That Support Predominantly Governmental Funds Differentiating between Governmental and Business -Type Activities Activities with External Parties Activities with Fiduciary Funds Zeporting Cash Flows of Proprietary Funds Basic Requirement and Purpose Focus of Statement Cash Flow Amounts Classification of Cash Flows Operating Cash Flows Noncapital Financing Cash Flows Capital and Related'Financing Cash Flows Investing Cash Flows Capital Distinguished from Noncapital Financing Formatting the Statement of Cash Flows Noncash Investing, Capital, and Financing Activities Cash Overdraft Position Exhibit 7-1: Illustration: Enterprise Fund Statement of Cash FIows INTRODUCTION 7.24 7.25 7.25 7.25 7.27 7.27 7.27 7.28 7.28 7.31 7.31 7.33 7.34 7.35 7.36 7.38 7.39 7.40 7.42 7.42 7.45 7.45 7.47 7.49 7.50 7.51 proprietary fund is used to account for a state or local govern- Lent's activities that are similar to activities that may be performed i a commercial enterprise. For example, a hospital may be oper- ed by a governmental unit, such as a city, or by a profit -oriented corporation. The accounting and reporting standards used by a pro- prietary fund and a business. enterprise are similar because the activities performed are basically the same. Although a proprietary fund is accounted for in much the same manner as a commercial enterprise, a proprietary fund is nonethe- less a fund used by governmental entities. NCGA-1 (Governmental Accounting and Financial Reporting Principles) defines a "fund" as A fiscal and accounting entity with a self -balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The basic objective of a proprietary fund, as alluded to in the NCGA's definition, is different from the fundamental purpose of a commercial enterprise. The purpose of a proprietary fund is not to maximize its return on invested capital. Generally, the purpose of a proprietary fund is to provide a service or product to the public or other governmental entities at a reasonable cost. The objective is achieved by creating one of the following two types of proprietary funds: an Enterprise Fund or Internal Service Fund. ENTERPRISE FUNDS An Enterprise Fund may be used to "report any activity for which a fee is charged to external users for goods or services." GASB-34 states that an Enterprise Fund must be used to account for an activity if any one of the following three criteria is satisfied (GASB-34, par. 67): 1. The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity. 2. Laws or regulations require that the activity's costs of providing services, including capital costs (such as deprecia- tion or capital debt service), be recovered with fees and charges, rather than with taxes or similar revenues. 3. The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service). OBSERVATION: Some financial statement preparers raised the question about whether the three criteria listed above apply to activities that are currently accounted for in Internal Service Funds. GASB-34 takes the position that an Enterprise 7.04 Fund Accounting Fund, not an Internal Service Fund, must be used when external users are the predominant participants in the fund. GASB-37 reemphasizes this point by adding a footnote to paragraph 67 that states, "the focus of these criteria is on fees charged to external users" (GASB-37, par. 14). The first criterion refers to debt secured solely by fees and charges. If that debt is secured by a pledge of fees and charges from the activity and the full faith and credit of the primary gov- ernment or component unit, this arrangement does not satisfy the "sole source of debt security" and the activity does not have to be accounted for (assuming the other two criteria are not satisfied) in an Enterprise Fund. This conclusion is not changed even if it is anticipated that the primary government or component unit is not expected to make debt payments under the arrangement. On the other hand, debt that is secured partially by a portion of its own proceeds does satisfy the "sole source of debt security' criterion. The second and third criteria refer to the establishment of a pric- ing policy that recovers costs, including depreciation expense or debt service. In some situations the activity might be responsible for little or no debt. The GASB Comprehensive Implementation Guide states that in this circumstance, the criteria are still met when debt service requirements (if any) are used to establish the pricing policy. There is no assumption that there is equality between the depreca- tion expense and the debt service on capital debt for a particular activity. The third criterion is similar to the previous standard for deter- mining when an Enterprise Fund should be used to account for an activity except that the new standard in GASB-34 is based on "established policies" rather than management's intent. OBSERVATION: The criteria established by GASB-34 are dif- ferent from those established by NCGA-1. The GASB believes that the establishment of the three criteria listed above will reduce the degree of subjectivity that is now used by govern- mental entities in determining when an Enterprise Fund should be used. The three criteria should be applied to a governmental entity's j cipal revenue sources; however, the criteria do nothave tobeappli "insignificant activities" of a governmental entity. If none of the cri apply, the activity can be accounted for in a governmental fund. OBSERVATION: The GASB Comprehensive Implementation Guide points out that while professional judgment must be used to determine what an activity's principal source of reve- nue is, the focus should be on the relationship between a par- ticular revenue source and an activity's total revenues. For Proprietary Funds 7.05 example, when 75% of a fund's revenue is provided from charges for services designed to cover the cost of the services, the service charges would clearly be considered the "princi- pal" revenue source for the fund. PRACTICE POINT: It should be noted that GASB-34 (Basic Financial Statements —and Management's Discussion and Analysis —for State and Local Governments) states that a fee - based activity can be accounted for in an Enterprise Fund even if the three criteria described above do not exist. The three criteria apply to fee -based activities that must be accounted for in an Enterprise Fund. Activities commonly reported as Enterprise Funds of state and local governments include the following: • Airport • Electric, gas, water; wastewater, and sanitation/landfill • Golf • Hospital or other health care services • Lotteries and gaming • Parking and transit • Unemployment insurance INTERNAL SERVICE FUNDS GASB-34 (Basic Financial Statements —and Management's Discus- sion and Analysis —for State and Local Governments) describes an Internal Service Fund as a proprietary fund that may be used to report "any activity that provides goods or services to other funds, departments, or agencies of the primary government and its component units, or to other governments, on a cost reimburse- ment basis." An Internal Service Fund should be used only when the reporting government itself is the predominant participant in the fund. When the transactions with the other governmental enti- ties represent the predominant portion of the activity, an Enterprise Fund must be used. There is no circumstance under which an Internal Service Fund must be used. For example, an activity may be centralized by a governmental entity whereby all departments, programs, and so forth within the reporting entity must use the centralized activity and be billed for the service provided. That activity could be accounted for in an Internal Service Fund, but it could also be