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Unformatted text preview: Chapter 17 - Accounting for State and Local Governments (Part 2) CHAPTER 17 ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS (PART 2) Chapter Outline I. Government entities often obtain property by lease rather than by purchase. A. Leases are recorded as either capital leases or operating leases based upon the criteria first established to record for-profit businesses by FASB Statement 13 . B. Based on this standard, a lease that meets any one of the following criteria is a capital lease: a. The lease transfers ownership of the property to the lessee by the end of the lease term. b. The lease contains an option to purchase the leased property at a bargain price. c. The lease term is equal to or greater than 75 percent of the economic life of the leased property. d. The present value of minimum lease payments equals or exceeds 90 percent of the fair value of the leased property. C. For a state or local government, a capital lease is recorded as follows: a. In the government-wide financial statements, the lease is reported as an asset and liability at the present value of the minimum leases payments and then depreciation expense (on the asset) and interest expense (on the liability) are recognized. b. In the fund-based financial statements for the government funds, the present value of the minimum lease payments is recorded as an expenditure and an other financing source. Later interest and principal payments are recorded as expenditures. No depreciation is reported because capital assets are not recognized in the governmental funds. II. Governments often establish solid waste landfills for the use of the citizens. These facilities can be recorded within the proprietary funds, if a user fee is assessed, or as part of the general fund if the landfill is open to the public without a charge. A. A landfill can eventually create a large liability for the government because of closure costs and post-closure maintenance and monitoring. B. On government-wide financial statements, recognition of this liability is based on accrual accounting and the economic resource measurement focus. Thus, the liability is recognized proportionally as the available space becomes filled. If the landfill is recorded as an Enterprise Fund, this same reporting is also appropriate for fund-based financial statements. C. If the landfill is reported within the General Fund, the liability is only reported on the fund- based statements when a claim to current financial resources comes into existence. 17-1 Chapter 17 - Accounting for State and Local Governments (Part 2) III. Many governments incur a liability for compensated absences (vacations, for example, and sick pay) earned by employees such as school teachers and police officers....
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- Spring '11