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Enterprise FundsChapter 10

Learning Objectives Determine what activitiesshould be reported usingEnterprise Funds.Understand the ProprietaryFund accounting principles.Understand ProprietaryFund reporting forintergovernmental grantrevenues and debtrefundings. Review typical ProprietaryFund transactions.Understand the formats &classifications of ProprietaryFund financial statements.Understand and be able tocompute the threecomponents of ProprietaryFund Net Assets.Prepare the ProprietaryFund financial statements.

Transition ChapterLeaving behind the newmaterial:Governmental FundAccounting & ReportingMoving to material thatwill look more familiar:Proprietary FundAccounting & Reporting

Common Characteristics &Principles Accounting EquationAccounting PrinciplesFinancial Statements

Accounting EquationTraditional Balance Sheet EquationCurrentAssets CapitalAssets OtherNoncurrentAssetsCurrentLiabilities Long-TermLiabilities NetAssetsORNew Net Asset EquationCurrentAssets CapitalAssets OtherNoncurrentAssetsCurrentLiabilities Long-TermLiabilitiesNetAssets

Accounting Principles Very similar to private sector counterpartsOften use fixed budgets May cause activity to be accounted for onbudgetary basis during the yearConverted to GAAP basis at end of the yearLegal or contractual reporting requirementsthat differ from GAAP met in CAFR or byissuing special purpose reports

Accounting Standards forProprietary Funds All Proprietary Funds follow: GASB StandardsCAP Bulletins, APB Opinions, and FASBStandards through #102, unless pronouncementconflicts with GASB StandardsGASB #20 requires governments to either Follow FASB Standards issued after #102, unlessit conflicts with GASB Standards, ORNot to apply subsequent standards [usual choice]

Financial Statements Statement of Fund Net Assets (or BalanceSheet)Statement of Revenues, Expenses, andChanges in Fund Net Assets (or Fund Equity)Statement of Cash Flows

Statement of Fund Net Assets Two formats allowed: Traditional Balance Sheet formatNew Net Asset formatEither way, statement must be classifiedStatement presents current and noncurrentassets and current and noncurrent liabilitiessimilar to private sectorWhat is different is the equity section

Categories of Fund Net Assets Invested in Capital Assets, Net of Related DebtRestricted Net AssetsUnrestricted Net AssetsContributed Capital and Retained Earnings nolonger used

Calculations of Net Asset Amounts Maintaining separate accounts during theyear unnecessary – amounts do not articulatewith other financial statementsTransactions may cause reclassificationsamong amounts – entry to recordunnecessaryAmounts usually calculated at year-end

Invested in Capital Assets,Net of Related DebtHistorical cost of capital assets– Accumulated Depreciation Net Book Value– Capital asset-related debt of the fund (adjustedfor unspent proceeds) Invested in Capital Assets, Net of Related Debt

Restricted Net Assets Amount of restricted assets in excess of noncapital borrowing and other liabilities payablefrom restricted assetsConstraints must be narrower than generallimits of activity

Restrictions Imposed By: Creditors, grantors, contributors, or laws andregulations of other governmentsConstitutional provisionsEnabling legislations that Authorizes government to assess, levy, charge orotherwise mandate payment of resourcesexternally, ANDPlaces legally enforceable purpose restriction onthose resources

Important Points aboutRestricted Net Assets Must be more limited than scope of activitiesaccounted for in fundMay not be reported as a negative amount – ifliabilities exceed assets, amount is reported as zeroand excess deducted from Unrestricted Net AssetsIf assets must be maintained in perpetuity, mustclassify Restricted Net Assets as expendable andnonexpendable (rare)Amount reported may be different than restrictedassets less liabilities payable from restricted assetsdue to classification problems

Calculation ofRestricted Net AssetsAssets restricted to a particular purpose– Noncapital liabilities directly associated with andpayable from restricted assets– Capital debt equal to unexpended proceeds ofcapital debt included in restricted assets Restricted Net Assets

Unrestricted Net Assets Remainder of net assets not reportedelsewhere (a “plug” number?)Designated by managementImportant points Designations are internal and may be changed bymanagementNot the same as expendable available financialassets like in Governmental FundsNot reported on face of statementVery rare in practice

Calculation ofUnrestricted Net AssetsAll other assets– All other liabilities Unrestricted Net AssetsORTotal Net Assets– Invested in Capital Assets, Net of Related Debt– Restricted Net Assets Unrestricted Net Assets

Statement of Revenues, Expenses, &Changes in Fund Net Assets

Key Difference from Private Sector All-inclusive approachRevenues reported net of uncollectibleaccounts and similar amountsNet income not reported in statementSpecial items and transfers unique toProprietary Fund reporting

Statement of Cash Flows Based on GASB #9 – issued 2 years afterFASB #95Several important differences Sections (GASB has 4; FASB uses 3)Direct method required (FASB allows eithermethod)Noncash transactions reported on face ofstatement (FASB #95 allows it to be reported innotes)

Sections of the SCF GASBOperating ActivitiesNoncapital FinancingActivitiesCapital and RelatedFinancing ActivitiesInvesting Activities FASBOperating ActivitiesFinancing ActivitiesInvesting Activities

Cash Flows fromOperating Activities Reflects only transactions affecting operatingincome (unlike FASB which includes alltransactions affecting net income)Excludes interest revenue and expenseSection is only one affected by requirementto use the direct method – reconciliation ofoperating income to cash flows fromoperating activities must still be presented

Cash Flows fromNoncapital Financing Activities Debt issued to finance operations, includingrelated interest reported in this sectionTransfers not related to capital acquisitionsreported here

Cash Flows fromCapital & Related Financing Activities Issuance and repayment of debt, includinginterest, issued to acquire capital assetsAcquisition and sale of capital assets(reported in FASB #95 investing section)

Cash Flows fromInvesting Activities Acquisition and subsequent sale ofinvestments in debt and equity instrumentsInterest and dividends received from suchinvestmentsMaking and collecting most loans (except foroperating loans which are reported inOperating Activities section)

Noncash Transactions Transactions not involving the actual flow ofcashExamples Signing a capital leaseCapital assets (or other noncash items) donatedto the Proprietary FundIssuing debt to acquire a capital assetUnrealized gains and losses on investments

Enterprise Funds vs.Internal Service Funds Enterprise FundsUsed to account foractivities that providegoods and servicesprimarily to the publicon a charge basisIf primary customersare internal togovernment, shouldreclassify as InternalService FundsInternal Service Funds Used to account foractivities that providegoods and services toother departments ofthe governmental unit If primary customersare external to thegovernment, shouldreclassify as EnterpriseFunds

When Use of Enterprise FundIs Required Activity is financed with debt that is securedsolely by a pledge of the net revenues fromfees and charges of the activityLaws or regulations require that the activity’scosts of providing services, including capitalcosts (such as depreciation or debt service),be recovered with fees and chargesPricing policies of the activity establish feesand charges designed to recover its costs,including capital costs

Common Examples of EFs Water & Sewer DepartmentsElectric UtilitiesGas UtilitiesSanitary Sewer OperationsGarbage and other waste collection & disposalservicesOff-street Parking Lots and GaragesSolid Waste LandfillsAirports

Governments may elect to useEFs even when not required Allows government to consistently use EFaccounting even when requirements notalways metGovernment seeks to report activity using fullcostGovernment seeking to make reporting morecomparable to other governments

Specific EF Topics Budgeting and appropriations practicesInterfund activityReporting grantsInterest capitalizationDebt refunding transactions

Budgeting and Appropriations Flexible budgets may be adopted to assist incontrol of operationsFixed budgets usually adopted because oflegal requirementsMany EFs operate on budgetary basis duringthe year and convert to GAAP at year-end

Interfund Activity Most transactions between EFs and GovernmentalFunds accounted for as interfund servicetransactionsBillings to other departments recorded as operatingrevenues“Free” services provided to other funds recognizedas Transfer to other fund with correspondingrevenueInterfund transfers are last item on operatingstatement

Intergovernmental Grants Capital grants restricted to construction, acquisition,or improvement of capital assets Reported on operating statement as first item after Incomebefore other revenues, expenses, and transfersReported in SCF as Capital and Related FinancingActivitiesOperating grants are all other grants Reported on operating statement as nonoperatingrevenuesReported on SCF as Noncapital Financing Activities

Interest Capitalization Interest cost on taxable debt follows guidanceof private sectorIf tax-exempt debt is used: Capitalization period starts when debt is issuedMust deduct interest earnings on temporaryinvestments in calculating interest cost to becapitalizedNo interest is capitalized on assets financedby restricted gifts or grants

Long-Term Debt Refundings Governmental Fund refundings discussed inChapter 8Private sector refundings discussed inFinancial Accounting coursesEF Refundings a whole new ball game

Essence of the RefundingDifferencesOld DebtWhere does difference go?100,00010,000New Debt110,000Governmental Funds – no gain or loss recorded; difference absorbed into OFUor Expenditures, as appropriate.Private Sector – extinguishment gain or loss (no longer extraordinary) in theperiod old debt is retired.Enterprise Funds – depends on funding sourceOwn resources: extraordinary gain or lossRefunding: gain or loss deferred and amortized

Situation #1 – No new debtBonds PayableLoss on Early Extinguishment of DebtUnamortized Discount on Bonds PayableUnamortized Bond Issue CostsCash[Page 402]1,935,00086,58235,0001,5821,985,000

Situation #1 – Refunding [Page 403]New Debt:CashUnamortized Refunding Bond Issue CostsRefunding Bonds PayableRetirement:Bonds Payable (old debt)Deferred Interest Expense AdjustmentUnamortized Discount on Bonds PayableUnamortized Bond Issue ,0001,5821,985,000

Deferred Interest ExpenseAdjustment Reported as deduction from (or addition to)Refunding BondsAmortized over shorter life of refunded bonds(old debt) and refunding bonds May use any rational systematic methodMost governments use straight-line method

Situation #1 – Interest effects[Page 403–404]Interest ExpenseCash80,000Interest ExpenseDeferred Interest Expense Adjustment –Refunding Bonds17,316Interest ExpenseUnamortized Refunding Bond Issue Costs80,00017,3161,5001,500

#1 EF established [Page 404]CashTransfer from GF400,000400,000

#2 Acquire existing plantLandBuildingsImprovements other than BuildingsMachinery & EquipmentAccounts ReceivableInventory of Materials and SuppliesAllowance for Uncollectible AccountsBonds PayableCompensated Absences PayableVouchers PayableDue to ABC Electric Company[Page 0,000100,00010,000280,000

#3 Pay amount due [Page 405]Due to ABC Electric CompanyCash280,000280,000

#4 Close Transfer accountTransfer from GFNet Assets[Page 405]400,000400,000Note use of Net Assets account. Governments usually don’t use separate NetAsset classifications. Aforementioned calculations are made at year-end.