Financial Reporting for Special Purpose Governmental Entities

by Edward W. Stepnick, CPA, continuing professional education consultant on government accounting and auditing, Venice, FL. Revised and updated by G. Robert Smith, Jr., Associate Professor of Accounting, Middle Tennessee State University, and Dwayne N. McSwain, Assistant Professor of Accounting, Appalachian State University.

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Introduction

The United States economy is comprised of two major sectors: the private sector and the public sector. Most accountants are well-versed in the components of the private sector. After all, the great majority of courses in most accounting programs cover - almost exclusively - the accounting and reporting principles of this sector of the economy. This sector consists of the proprietorships, partnerships, and corporations that all accountants have studied over the years.

Although the composition of public-sector accounting is not well studied, it is very well known.

And the most familiar type of governmental entity is the general purpose government - the state, county, parish, city, municipality, village, township, or borough. Each general purpose government usually provides a broad range of public services, such as public safety, public health, public works, and recreation. As of June 30, 2007, general purpose governments in the United States included 50 state governments, 3,033 county governments, 19,492 parishes, cities, boroughs, and municipalities, and 16,519 townships.

But much more numerous are special purpose governmental entities...

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Although financial reporting standards in government accounting are developed from the perspective of general purpose governments, the standards also apply to the separately issued, stand-alone financial statements of special purpose governmental entities. However, in contrast to the financial reporting of whether the government is a state, county, or city, the requirements for stand-alone statements of special purpose governmental entities may vary depending on the types of activities in which the entity engages.

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Single-Program Governments

Many special purpose governmental entities, such as cemetery districts, levee districts, assessment districts, and drainage districts, engage in a single program or activity. Rather than presenting separate sets of government-wide and fund financial statements in their normal formats (as discussed in Chapter 17 of Applying Government Accounting Principles), this type of entity may present both government-wide and fund financial data in one set of statements, reconciling the individual line items in a separate column on the face of the financial statements. Alternatively, the entity may present separate government-wide and fund financial statements, but it can modify the format of the statement of activities by reporting expenses and revenues in a single column...

Multiple-Activity Special Purpose Governments

Special purpose governmental entities engaged in more than one governmental program, or in both governmental and business-type activities, should follow the reporting standards for general purpose governments...

Government-Wide Financial Statements

The statement of net assets should contain three columns showing the amounts of assets and liabilities devoted to the institution's governmental activities, business-type activities, and total activities, respectively. The college's institution-wide statement of activities should show the net revenue or expense of each college function or program. For governmental activities, typical functions include instruction, academic support, student services, public service, general administration, institutional support, interest, and unallocated depreciation. For business-type activities, the college bookstore, food services, and industrial training are typical.

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Fund Financial Statements

In addition to the government-wide financial statements, special purpose governmental entities engaged in more than one government program, or in both governmental and business-type activities, should present separate sets of financial statements in their normal formats for their governmental, proprietary, and fiduciary funds, respectively.

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In the proprietary fund statements, the amounts for major enterprise funds (e.g., in a community college, the college bookstore fund, food service fund, and industrial training fund) should be displayed in separate columns. Operating revenues usually consist of charges for services, while operating expenses include salaries and benefits, contractual services, materials and supplies, conferences and meetings, and depreciation. Cash flow statements should be prepared using the direct method. [GASB Statement No 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, 91-105 (1999).]

Business-Type Special Purpose Governments

Special purpose governmental entities engaged solely in business-type activities are not required to present government-wide financial statements. They may limit their basic financial statements to those normally required for enterprise funds...

Fiduciary Special Purpose Governments

Special purpose governmental entities engaged solely in fiduciary activities may limit their financial reporting to a statement of fiduciary net assets and a statement of changes in fiduciary net assets, accompanied by management's discussion and analysis and notes to the financial statements....

Governmental External Investment Pools

The separate or stand-alone annual financial reports for governmental external investment pools should include management's discussion and analysis (MD&A), a statement of net assets, a statement of changes in net assets, notes to the financial statements, and required supplementary information. A statement of cash flows is not required...

 Public Entity Risk Pools

For accounting and financial reporting purposes, a public entity risk pool is defined as "a cooperative group of government entities joining together to finance an exposure, liability, or risk." [GASB Statement No 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, 10 (1989).] A risk pool may be a stand-alone entity or part of a larger government entity that acts as the pool sponsor...

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A pool may also cover losses of participating employers that provide accident and health, dental, and other medical benefits to its employees, retirees, and their dependents and beneficiaries, based on covered events that have already occurred. However, risk pools do not cover losses relating to postemployment benefits that governmental employers expect to provide current and future retirees, their beneficiaries, and their dependents. Also excluded are Medicaid insurance plans provided to low-income state residents under Title XIX of the Federal Social Security Act...

Revenues

Risk pools are financed by premiums collected from the member governmental entities. Premiums not subject to adjustment are usually recognized as revenues over the period covered in proportion to the risk protection provided, using the straight-line method. Premiums are subject to adjustment. However, if the final premium can be reasonably estimated, the estimated premiums should be recognized as revenues over the contract period. If the final premium cannot be reasonably estimated, the cost recovery method or the deposit method should be used until the final premium amount is determined...

Expenses and Claim Liabililties

Risk pools should accrue expenses for unpaid liabilities, including amounts for estimated claim, claim adjustment, and settlement expenses, net of estimated recoveries from salvage or subrogation. Claim liabilities may be reported in total or at their discounted present value. Discounting is required, however, for structured settlements if a contractual obligation requires payments of specific amounts on determinable dates. If the claims liabilities are discounted, the discount rate should be determined in relation to the pool's settlement rate and its investment yield rate. For annuity contracts purchased in a claimant's name when the likelihood of future payments is remote, no asset or liability should be reported because the pool is considered to have satisfied its primary liability...

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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