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2011 F-9 Class Notes - 2011 Edition — Financial 9 Class...

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Unformatted text preview: 2011 Edition — Financial 9 Class Notes FINANCIAL9 class notes Financial 9 includes the following: GOVERNMENTAL ACCOUNTING (PART B) A. Government-wide financial statements are prepared on the accrual basis reflecting the economic resources measurement focus. Funds have financial statements prepared using their specific accounting method in order to better demonstrate compliance with government leaders' decisions (fiscal accountability) while the government-wide financial statements display achievement of operating objectives (operational accountability). The integrated approach requires reconciliation between operational and fiscal accountability objectives (the fund financial statements are reconciled to the government- wide financial statements). The sequence of financial reporting presentation is: 1. Governmental entity's financial statements start with management's discussion and analysis (MD&A). 2. Government-wide financial statements and fund financial statements follow (including a reconciliation of modified accrual governmental funds to the government-wide financials on the accrual basis). Internal Service funds are included with the governmental funds (GRASPP) as Governmental Activities. Enterprise funds are included as Business Type Activities. Fiduciary funds are not included in GWFS since they are custodial in nature. 3. Notes to the financial statements 4. Required supplementary information (RSI) (other than MD&A) The financial reporting entity is the primary government entity and all component units that should be included with it. General purpose governments (e.g., states, counties and cities) are almost always considered a primary government and therefore have their own financial statements. Special-purpose local governments will be treated as a primary governmental entity if they have separately elected leaders, are legally separate entities and are fiscally independent. It stands by it [SELF] Component units do not meet the SELF criteria and may be blended in with the primary government if they are "intertwined" with it (the component unit is not a legal entity, the boards of the component unit and primary government are substantially the same, or the component unit serves the primary government exclusively). A discrete presentation is required if the component is legally separate but financially accountable to the primary government. Most component units should use discrete presentation. MD&A must be an easily readable summary of the financial statements and will likely include a description of major initiatives and analyze material variances. Government-wide financial statements (GWFS) are presented in net asset format (A - L = NA). Net assets consist of three components: 1 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. 2011 Edition — Financial 9 Class Notes 1. Invested in capital assets net of accumulated depreciation and related debt 2. Restricted net assets (external restrictions) 3. Unrestricted net assets (no external restrictions) Capitalized assets in the GWFS will include infrastructure-type assets unless the government elects to use the modified approach. The modified approach includes infrastructure data in RSI: 1) a condition assessment of assets, and 2) annual estimate of the amounts required to maintain the assets. Depreciation is required; however, if the modified approach is used for infrastructure assets, ordinary maintenance is expensed and additions or improvements are capitalized. Donated artwork and historical treasures should be capitalized at their fair values but capitalization is optional if they will be exhibited, preserved and the proceeds of any sale will be used to acquire other assets for the collection. The government-wide statement of activities will include program revenues (SOC) resulting from exchange-type (charges for services) or non-exchange-type transactions such as operating or capital grants. Fund financial statements require establishing the criteria for major funds. There are two criteria (10% of GRASPP or E and 5% of GRASPP and E) must be met for a fund to be considered major. The General Fund is always major while Internal Service funds are excluded from major fund consideration. Reconciliation between modified accrual governmental funds and government-wide accrual basis financial statements is performed for the Balance Sheet (GALS BARE) and the Statement of Revenues, Expenditures and Changes in Fund Balance (GOES BARE). Required supplementary information other than MD&A may include pension data, infrastructure data and budgetary comparisons of the original and final budgets as well as the actual amounts. Computing variances is optional. lnterfund activity may include interfund loans (due to/from), interfund services provided or used, and interfund transfers or reimbursements. Within the governmental activities and business type activities columns we will eliminate interfund activity and between columns we will not eliminate interfund activity. |I. NOT-FOR-PROFIT ORGANIZATIONS IN GENERAL A. Not-for-profit entities frequently depend significantly on donations or contributions. The accounting rules for these entities come from the FASB. These entities include: hospitals, colleges, voluntary health and welfare organizations and other not-for-profit entities. All of these entities use accrual accounting. The required financial statements include the statement of financial position, statement of activities, statement of cash flows and (for voluntary health and welfare organizations) statement functional expenses. Net assets are comprised of three elements: 2 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. 2011 Edition — Financial 9 Class Notes 1. Unrestricted net assets (no external restrictions) 2. Temporarily restricted net assets (external restrictions as to time of use or manner used) 3. Permanently restricted net assets (principal cannot be used) When a donor-imposed restriction is satisfied, the amount ceases to be temporarily restricted and is re-classified to unrestricted. Program services represent the major or main activities of the organization performed in furtherance of the organization's mission. Support services represent administration-type functions within the organization. Combined costs need to be allocated between program and support services using any reasonable means. In the statement of cash flows transactions are classified in a manner consistent with commercial accounting. Most donations are operating activities except for certain donations restricted for capital outlay that are financing activities. The statement of functional expenses displays three major categories of expenses: program support, fund-raising and administrative-type. Earnings are classified as contributions, revenues or other support. Revenues usually reflect 'exchange-type' transactions. Contributions and other support usually include donations. Unconditional promises (pledges) are recorded as revenues for the portion considered collectible after treating the entity's estimate of uncollectability as an allowance for uncollectible accounts. Conditional promises are not recognized as revenue until the condition has been satisfied. Donated services are only recognized as revenue and an equal and offsetting expense SOME of the time. The donated service must generally be a specialized service, othenrvise needed and measured easily. Donated collection items are subject to the same rules as for governments; i.e., capitalize at fair value, however, optional if collection is exhibited, preserved and proceeds of any sale are to be used to acquire other assets for collection. Donated materials increase assets and support (revenues) at fair value at the time of the donation. Agency transactions result in an asset and a liability. These amounts are really the property of another party. If a not-for-profit does not have "variance power" over the asset (they don't have discretion over how the asset is used), it is an agency transaction. Gifts in kind (non-cash) are accounted for at fair value. The cost of premiums in an exchange transaction is a fund-raising expense. Transfers of assets to a NFP organization or charitable trust that holds contributions for others are treated as "an extension of the equity method of accounting." lf variance power is present, treat inflows as revenue. If no variance power is present, treat inflows as liabilities (an agency transaction). Beneficiaries recognize their rights to assets held by others unless the recipient is explicitly granted variance power. 3 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. IV. R. 2011 Edition — Financial 9 Class Notes Investments in securities are reported at fair value. Gains and losses are reported in the Statement of Activities as increases or decreases in unrestricted net assets unless use is restricted (by donor). SPECIFIC INDUSTRY APPLICATIONS: COLLEGES A. B. C. Colleges use accrual basis of accounting. Tuition revenues are recorded at gross amounts. Any price breaks given to students as scholarships or because of any relationship to faculty/staff are treated both as expenses and revenues. The main category of revenue comes from tuition and fees. Non-operating revenues include government aid, government grants, government contracts, private gifts and grants, endowment income. Other operating revenue includes "peripheral" types of revenue (e.g., bookstore). SPECIFIC INDUSTRY APPLICATIONS: HOSPITALS A. Patient service revenues are recorded at gross amounts but displayed on the statement of activities net of discounts. Discounts given to third party payers are called contractual allowances and are treated in a manner similar to sales discounts. Patient service revenues are recorded in the general ledger gross of these discounts, if any, but reported net of discounts as "Net patient revenue". Charitable services (charity care or other deep discounts that are generally provided based on poverty guidelines) are not recorded as revenues because there was no intention to collect. Other operating revenue includes donated supplies/equipment, cafeteria revenue, parking fees and gift shop revenue. Non-operating revenue includes all unrestricted gifts and donations plus donated services (meeting the SOME criteria). SPECIFIC INDUSTRY APPLICATIONS: VOLUNTARY HEALTH AND WELFARE ORGANIZATIONS A. Most resources to VHWO are donations. B. VHWOs use accrual accounting. C. VHWOs are required to report a statement of functional expenses. 4 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. ...
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