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Unformatted text preview: Chapter 9 Business-Type Activities Questions for Review and Discussion 1. Per GASB Statement No. 34, which establishes the new reporting model, governments may account for an activity in an enterprise fund as long as it charges fees to external users for goods and services. They are required to account for an activity in an enterprise fund if it satisfies any one of the following criteria: The activity is financed with revenue, as opposed to general obligation, debt. Laws or regulations require that the activitys costs of providing services (including capital costs) be recovered by fees and charges rather than general purpose taxes or similar charges. The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service). Thus, if the golf course is financed by user fees, but does not satisfy any of the other criteria, then the government may, but is not required to, account for it in an enterprise fund. 2. Enterprise funds are accounted for on a full accrual basis. Thus, they are accounted for similarly to businesses. Governmental funds, by contrast, are accounted for on a modified accrual basis. The arguments in favor of using the full accrual basis to account for enterprise funds include the following: The full accrual basis of accounting (i.e., a measurement focus upon all economic resources) captures all the resources and obligations, including capital assets and long-term obligations, associated with an activity. It thereby provides a more complete picture of the entitys fiscal status and operating results. The measurement focus on all economic resources is more consistent with the GASBs objectives that financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current- year services and to assist users in assessing service efforts, costs and accomplishments. Full accrual accounting provides information on depreciation, which is an essential cost of operations. 9-1 Business-type accounting facilitates comparisons with similar private enterprises. Those against include the following: Two separate measurement focuses and bases for accounting within the same set of financial statements are confusing and limit the usefulness of entity-wide consolidated statements that purport to present an overview of the entity as an economic whole. There are no clear-cut distinctions between business and non-business activities. Despite many similarities, government activities can not and should not be compared to activities carried out in the private sector. A government should have sound political and economic reasons other than merely earning a profit for conducting a particular activity in the public sector. If it does not, then it should be privatized. These reasons, by themselves, suggest that the activities should be assessed by criteria other than profits the bottom line of...
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- Spring '11