Chapter 06D - Expenditure Accounting Expenditure Accounting...

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Unformatted text preview: Expenditure Accounting: Expenditure Accounting: Governmental Funds Chapter 6 Learning Objectives Learning Objectives Define expenditures Understand & apply expenditure recognition guidance Understand multiple classifications of expenditures Account for typical debt service & capital outlay expenditures Understand accounting for capital leases, claims & judgments, compensated absences, pension, and OPEB expenditures Account for changes in expenditure accounting principles and error corrections Expenditures Expenditures Foundation of planning, authorizing, controlling, & evaluating activities of governmental funds Measure of fund liabilities incurred (or expendable financial resources used) Typically classified as: – Current Operations – Capital outlay – Debt service When to recognize expenditures When to recognize expenditures In the accounting period in which the fund liability is incurred except for unmatured principal and interest on long­term liabilities, which should be recognized when due Expenditure / Expense Comparison Expenditure / Expense Comparison Expenditures Operating Chapter 6 Capital Outlay Chapter 7 Debt Service Chapter 8 Expenses Salaries, supplies, utilities, etc. Acquisition Salaries, supplies, utilities, etc. Depreciation Principal & interest Interest Expenditure / Expense Expenditure / Expense Comparison Expenditure Recognition Expenditure Recognition Options Interest on long­term debt maturing in following fiscal year may be accrued in current fiscal year if due “early” (not more than one month) in next year Inventory expenditures may be recognized using either purchases method or consumption method Prepayment expenditures [prepaid items or “prepayals”] may be allocated over benefited period or accounted for only in current period Intergovernmental: Intergovernmental: The “New” Expenditure Classification Frequently incurred in conjunction with state revenue­sharing, grant, and other financial assistance programs with local governments Classification indicates that expenditure was not for state­level operations Timing of Expenditure Recognition Timing of Expenditure Recognition When Acquired Salaries and wages Contractual services Capital outlay Interest on fund liabilities Materials and supplies (Purchases Method) Insurance (Purchases Method) Rent (Purchases Method) Timing of Expenditure Recognition Timing of Expenditure Recognition When Used Materials and supplies (Consumption Method) Insurance (Consumption Method) Rent (Consumption Method) Timing of Expenditure Recognition Timing of Expenditure Recognition When Due Interest on GLTL GLTL principal retirement Claims and judgments Compensated absences Pensions Other Postemployment Benefits (OPEB) Accounting for Personal Accounting for Personal Services Ensure that the persons is a bona fide employees Determine rates of pay Establish amounts earned by employees Record payments made to employees Charge expenditures to proper accounts Pension Cost Expenditures Pension Cost Expenditures Payments to pension plans, even self­ administered ones, qualify as expenditures Most governments use either: – Defined contribution pension plan – Defined benefit contribution plan Defined Contribution Plan Defined Contribution Plan Government obligation is limited to making contributions required by the plan Retiree benefits dependent upon contributions made and investment performance of the plan Government should recognize expenditure in year employees earnedbenefit – underpayment is a fund liability Defined Benefit Plan Defined Benefit Plan Government obligation is to pay certain amount to retirees each period Annual required contribution (ARC) based on many actuarial assumptions: – – – – – Years of service Inflation and pay rates over time Employee turnover Retiree life spans & mortality rates Plan funding, investment returns, & administrative costs Underpayments are not fund liabilities Accounting for Materials & Supplies Accounting for Materials & Supplies When accounting for materials & supplies inventory, it is good to keep two things mind: In the consumption method, the expenditures account reports the amount of supplies used – that is why changes in inventory level are charged to that account In the purchases method, the expenditures account reports the amount of supplies purchased – that is why changes in inventory are charged to OFS (increases) and (OFU) decreases Inventory Accounting Methods Inventory Accounting Methods Consumption Method – Perpetual System Purchased Inventory Issued Vouchers Payable Expenditures Inventory Year­end Over Inventory Expenditures Short Expenditures Inventory Inventory Accounting Methods Inventory Accounting Methods Consumption Method – Periodic System Purchased Expenditures Issued Vouchers Payable No entry Year­end Increase Inventory Expenditures Decrease Expenditures Inventory Inventory Accounting Methods Inventory Accounting Methods Purchases Method Purchased Expenditures Issued Vouchers Payable No entry Year­end Increase Inventory OFS – Inventory Increase Decrease OFU – Inventory Decrease Inventory Accounting for Prepayments Accounting for Prepayments Known as prepaid expenses in the private sector or in Proprietary Funds Examples include: – Insurance – Rent Accounting for Prepayments: Options Accounting for Prepayments: Options May use either consumption method or purchases method Under consumption method, balance in account reported as an asset Under purchases method, balance is not reported as an asset since amount has already been charged to expenditures Capital Leases Capital Leases GASB requirements have adapted private sector requirements for accounting for capital lease: Assets under capital lease are recorded in General Capital Assets with corresponding entry in General Long­term Liabilities Asset is recorded in appropriate fund as capital outlay expenditure with corresponding Other Financing Source for in­substance debt issued to acquire asset Use of Capital Projects Fund for acquisition or Debt Service Fund for paying principal and interest not required Review of Private Sector Entries Review of Private Sector Entries Also used in Proprietary Funds Inception of the Lease Equipment Under Capital Lease 900 860 Obligations Under Capital Lease 40 Cash Annual Lease Obligation Obligations Under Capital Lease Interest Expense Cash 13 5 18 Contrast with Governmental Fund Contrast with Governmental Fund Adjusting Entries Adjusting Entries Rules are not the same as revenue adjusting entries – availability criterion does not apply General rule – Record expenditure and related liability, unless the liability is noncurrent – Alternate view: if expenditure is normally paid from current financial resources, it should be recorded with related fund liability – applies primarily to accruals for debt service, claims and judgments, accrued vacation and sick leave, and pension plan contributions Encumbrances Encumbrances Review outstanding encumbrances at year­end to determine if the order has been filled Failure to properly record expenditures could be – Unintentional – invoices and receiving reports not received in a timely manner at year­end – Intentional – department trying to avoid going over budget for the year Long­Term Debt Service Long­Term Debt Service Debt service (principal and interest) normally not accrued at year­end Governments may accrue if two conditions are met: – Debt service payment occurs early (not more than 30 days) in the next fiscal year; and – Dedicated financial resources must have been provided in current fiscal year If accrual is made, it must be for full amount Short­Term Debt Service Short­Term Debt Service Governmental funds may borrow on short­ term basis using: – Tax anticipation notes (TANs) – Revenue anticipation notes (RANs) – Bond anticipation notes (BANs) – Other similar short­term notes Recorded as fund liabilities Accrue interest at year­end Claims & Judgments Claims & Judgments Employment – workers compensation or unemployment claims Contractual actions – claims for delays or inadequate specifications Actions of governmental personnel – medical malpractice, damage caused by government­ owned equipment, or improper police arrest Government properties – claims related to personal injuries & property damage May be difficult to estimate ultimate May be difficult to estimate ultimate liability Unreasonably high claims Time between occurrence and filing Time between filing and settlement and payment GASB Standards GASB Standards Claims against the government are contingencies – rules of FASBS #5 have been adapted Liability is recorded if: – It is probable that an asset has been impaired or a liability has been incurred (as of date of financial statements) – Amount can be reasonably estimated If criteria not met, outstanding claims are disclosed in the notes FASBS #5 Criteria Are Met FASBS #5 Criteria Are Met Amount calculated reported as fund liability if amount is payable from expendable current financial resources – amount would include legal & other related costs and the settled or adjudicated amount, net of any insurance recoveries Any remaining liability would be recorded as a General Long­Term Liability Insurance Insurance In governmental funds, insurance claims recorded as Other Financing Source (or, possibly as an extraordinary item) If insurance settlement is delayed, reservation of fund balance would be necessary to indicate that settlement receivable is not available for expenditure If insurance settlement cannot be reasonably estimated, no receivable or OFS recognized until estimate can be made Self Insurance / No Insurance Self Insurance / No Insurance Governments self­insured because of escalating insurance rates – generally pay for all claims up to a certain amount Alternative is no insurance – establish significant reserves to handle claims Both choices may use umbrella policies to cover catastrophic losses Compensated Absences Compensated Absences Vacation & similar compensated absences Sick leave & similar payments Vacation Leave Vacation Leave Must accrue a liability when both conditions are met: Employees’ right to receive compensation for future absences are attributable to serviced already rendered; AND It is probable that the employer will compensate the employees through paid time off or with cash payments at termination or retirement Sick Leave Sick Leave Expenditures of the year(s) in which the employees are ill Accrued only if it is probable that the employees will be paid upon retirement or termination Compensated Absences Accrual Rules Compensated Absences Accrual Rules Liabilities are accrued at current salary levels For vacation leave, accrual may be capped by amount that may be carried forward at end of current year Sick leave capped by amount that will be paid at retirement or termination If not payable from current financial resources, liability is in General Long­Term Liability list Pension / OPEB Contributions Pension / OPEB Contributions GASBS #27 provides rules for determining contribution amounts – requires: – Use of acceptable actuarial methods in calculating contributions to defined benefit plan – Enforce contractual requirements for defined contribution plans GASB requires recognition of expenditures and liabilities in same matter as compensated absences and claims & judgments – Amount payable from current financial resources recorded as fund liability – Other amounts recorded in General Long­Term Liabilities New Requirements for OPEB New Requirements for OPEB Accounting & Reporting Published under GASBS #43 and #45 in 2004 Examples: – Healthcare insurance – Vision insurance – Life insurance Requirements are very similar to what is required for pensions Expenditure Reporting: Expenditure Reporting: GAAP vs. Budgetary Level of required detail may be different in budgetary reporting than in GAAP reporting May report at different level of summarization – may use function for GAAP reporting but by department for local use Change in Accounting Change in Accounting Principles Expenditure not previously measurable may now be considered reasonably estimable Change from one acceptable alternative principle to another Change in method of applying a principle GASB issues new expenditure recognition criteria (new standard) that is different from policy currently in use Error Correction: Error Correction: Same Process as with Revenues 3 step process 1. Recognize the erroneous entry that was recorded 2. Determine what the correct entry should be 3. Fix the error by essentially combining steps 1 & 2 Error Correction Issues Error Correction Issues If error is caught in same year, fairly simple process to reverse it and record correction If error was made in a previous year, must consider if accounts affected have been closed – may result in a “Correction of Prior Year Error” Classification of Expenditures Classification of Expenditures Basic classification is by fund Other options include: – Function or program – Public Safety – Activity – Police Administration, Crime Control, Traffic Control, etc. – Organization unit – Police Department and Fire Department – Character – Operating, Capital Outlay, Debt Service – Object class – Personal Services, Supplies, Land, etc. ...
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This note was uploaded on 10/17/2011 for the course ACCT 4325 taught by Professor Staff during the Spring '08 term at UT Arlington.

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