State and Local Governments: Fund Accounting and the Two Measurement Focuses
Two statement sets, two measurement focuses
Governmental questions usually hinge on knowing which statements you are reading. Government-wide statements (statement of net position and statement of activities) use the economic resources measurement focus and full accrual, include governmental and business-type activities, and exclude fiduciary funds. Fund financial statements use the current financial resources focus and modified accrual for governmental funds; proprietary and fiduciary funds use accrual.
Fund types
Governmental: general, special revenue, debt service, capital projects, permanent. Proprietary: enterprise (serves external users, e.g., a water utility) and internal service (serves other departments). Fiduciary: pension and other employee benefit trusts, investment trusts, private-purpose trusts, custodial funds.
Traps
- Modified accrual recognizes revenue when measurable and available - property taxes generally within 60 days of year-end - and expenditures when the liability is incurred and will be liquidated with current resources.
- Encumbrances are budgetary entries, not GAAP expenditures, and appear only in budgetary comparison schedules.
- Capital outlay is an expenditure in governmental funds but is capitalized government-wide; depreciation appears only government-wide.
- Long-term debt proceeds are other financing sources, not revenues.
- The statement of activities reports net (expense) revenue by function and eliminates interfund transfers between governmental and business-type activities.
Worked example
A city's general fund records a $400,000 fire truck purchase as an expenditure. In the government-wide conversion, the expenditure is removed, the truck is capitalized at $400,000 with depreciation recorded, and the net effect flows to net position.