Question

Describe the purpose and the financial reporting requirements for the General and Special Revenue Funds. Include the way the modified basis of accounting is used to account for revenues and expenditures along with the use of budgetary accounts in your discussion.

Answer 1

A general fund is the primary fund used by a government entity. This fund is used to record all resource inflows and outflows that are not associated with special-purpose funds. The activities being paid for through the general fund constitute the core administrative and operational tasks of the government entity.

A general fund is

1. Used to account for all financial resourcesthat are not restricted to specific purposesor otherwise required to be accounted for in another fund.
2. Only fund that all governments have.

A special revenue fund is an account established by a government to collect money that must be used for a specific project. Special revenue funds provide an extra level of accountability and transparency to taxpayers that their tax dollars will go toward an intended purpose.

Special Revenue Funds is :
1. Used to account for general government financial resources that are restricted by law or contractual agreement to specific purposes other than debt service or major capital projects.
2. Exist as long as the government has resources dedicated to specific purposes

Financial reporting requirements for the

General Fund

The financial statements used to present governmental funds are:

1.Government-wide financial statements:
-Statement of net position
-Statement of activities
2. Fund financial statements:
- Balance sheet
- Statement of revenues, expenditures and changes in fund balances

Note:

Present a governmental fund balance sheet containing deferred outflows of resources and/or deferred inflows of resources, if applicable, in the following format:

Assets + deferred outflows of resources = liabilities + deferred inflows of resources + fund balance

The fund financial statements for governmental funds are presented using the current financial resources measurement focus and the modified accrual basis of accounting.

GASB 34, as amended by GASB 63, requires the following format presentation for the governmental funds balance sheet:

(Assets + deferred outflows of resources) = (liabilities + deferred inflows of resources) + (fund balance).

GASB 34 requires the elements of the governmental funds statement of revenues, expenditures and changes in fund balances to be presented in the following order:

1.Revenues
2.Expenditures
3.Excess (deficiency) of revenues over expenditures
4.Other financing sources and uses (including transfers)
5.Special items
6.Extraordinary items
7.Net change in total fund balance
8.Fund balance beginning of period
9.Fund balance end of period

Initially report inventories and prepaid items as an asset at the time of purchase and defer the recognition of an expenditure until the period in which the inventories are consumed or the prepaid items are used.

Governmental fund reporting focuses primarily on the sources, uses and balances of current financial resources and often has a budgetary orientation. The governmental fund category includes the general fund, special revenue funds, capital projects funds, debt service funds and permanent funds.

Special revenue fund

A special revenue fund is an account established by a government to collect money that must be used for a specific project. Special revenue funds provide an extra level of accountability and transparency to taxpayers that their tax dollars will go toward an intended purpose.

In the periodic budget process that every municipality goes through, there are negotiations and battles over money — where does it come from, who gets it, and how much they get. There are four basic buckets of budget money to be allocated: general fund, capital fund, "rainy day" fund and special revenue funds. The general fund pays for usual and ongoing town expenses; the capital fund is earmarked for large projects, and the rainy day fund is the emergency account for unexpected expenditures. A special revenue fund is established to finance and operate dedicated smaller-scale projects. Parks, libraries, beaches and town plazas may all be financed by special revenue funds. These projects will have their own set of books for recording cash inflows and outflows.

The Government Accounting Standards Board (GASB) issued Statement No. 54 in 2011, to clarify the definition of special revenue funds, as there was some ambiguity before. From the Statement: "Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects."

A city might establish a special revenue fund to pay expenses associated with stormwater management. The money in this fund could only be used for stormwater management costs, such as street sweeping, drain and ditch cleaning, system maintenance, and a public awareness campaign. The city would be required to publicly report on where it collected the special revenue fund money from and how it spent the special revenue fund's budget.

The budget must include a complete financial plan for all County funds and activities subject to appropriation, including proposed tax rates, an estimate of all income and revenue and all proposed expenditures for current operations, debt service, and capital expenses.

Modified basis of accounting is used to account for revenues and expenditures along with the use of budgetary accounts in your discussion.

The accounting and financial reporting treatment applied to an account is determined by its measurement focus. All governmental fund type accounts are accounted for using a flow of current financial resources measurement focus. With this measurement focus, only current assets and current liabilities and deferred outflows of resources and deferred inflows of resources generally are included on the Governmental Funds Balance Sheet. Operating statements for these accounts present inflows (i.e., revenues and other financing sources) and outflows (i.e., expenditures and other financing uses) of expendable financial resources.

All proprietary and trust fund type accounts are accounted for using a flow of economic resources measurement focus. With this measurement focus, all assets and liabilities associated with the operations of these accounts are included on their respective statements of net position. Operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in total net position. Net position in proprietary fund type accounts is segregated into three components: net investment in capital assets; restricted; and unrestricted. Net position for trust fund type accounts represents assets held in trust for external individuals and organizations.

The modified accrual basis of accounting is used by all governmental fund type accounts. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual (i.e., when they become both measurable and available). “Measurable” means the amount of the transaction can be reasonably estimated. “Available” means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Primary revenues that are determined to be susceptible to accrual include sales taxes, business and occupation taxes, motor fuel taxes, federal grants-in-aid, and charges for services.

Revenues from property taxes are determined to be available if collectible within 60 days. Taxes imposed on exchange transactions are accrued when the underlying exchange transaction occurs if collectible within one year.

Revenue for timber cutting contracts is accrued when the timber is harvested. Revenues from licenses, permits, and fees related to prior services or activity (such as fees based on volume of activity) are accrued as revenue in the period in which the service or activity occurs. Revenues from licenses, permits, and fees related to a future time period (such as driver and motor vehicle licenses) are recognized as revenue when received in cash.

Revenues related to expenditure driven grant agreements are recognized when the qualifying expenditures are made provided that the availability criteria is met. Pledges are accrued when the eligibility requirements are met and resources are available. All other accrued revenue sources are determined to be available if collectible within 12 months.

Property taxes are levied in December for the following calendar year. The first half year collections are due April 30 and the second half year collections are due October 31. Since the state is on a fiscal year ending June 30, the first half year collections are recognized as revenue, if collectible within 60 days of the fiscal year end. The second half year collections are recognized as receivables offset by unavailable revenue. The lien date on property taxes is January 1 of the tax levy year.

Under modified accrual accounting, expenditures are recognized when the related liability is incurred. Exceptions to the general modified accrual expenditure recognition criteria include unmatured interest on general long-term debt which is recognized when due, and certain compensated absences and claims and judgments which are recognized when the obligations are expected to be liquidated with expendable available financial resources.

All proprietary and trust fund type accounts are accounted for using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when they are earned and expenses are recognized when incurred.

In governmental fund type accounts, the state defers recognition of revenue under certain conditions. Unavailable revenues arise when a potential revenue does not meet both the “measurable” and the “available” criteria for revenue recognition in the current period. In all account types, unearned revenue arises when resources are received by the state before it has a legal claim to them, such as when grant monies are received prior to incurring qualifying expenditures/expenses.

For government-wide reporting purposes, the state uses the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Property taxes are recognized as revenue in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Governmental fund type accounts are budgeted materially in conformity with GAAP. Certain governmental activities are excluded from budgetary reporting because they are not appropriated. These activities include: activities designated as nonappropriated by the Legislature, such as the Higher Education Special Revenue Fund, Higher Education Endowment Fund, federal surplus food commodities, electronic food stamp benefits, capital leases, note proceeds, and resources collected and distributed to other governments. The differences between budgetary reporting and GAAP reporting are reconciled and disclosed in the notes to the state's budgetary comparison schedules

Example

Financial structure

Description of the Accounting Structure:
The accounting system used by the City of Chesapeake is organized on the basis of funds or account
groups. A fund is defined as a separate, self-balancing set of accounts which is segregated for the
purpose of accounting for specific activities or attaining certain objectives. Each fund is comprised of
assets, liabilities, fund equity, revenues, and expenditures or expenses, as appropriate. The following
fund types and account groups are used by the City: Governmental Funds (such as the General Fund and
Special Revenue Funds), Proprietary Funds (such as the Enterprise Funds and Internal Services Funds),
and Fiduciary Funds. The appropriations within each fund are further classified into function codes and
expenditures within each function are posted to object codes.

Basis of Accounting:
The City’s Comprehensive Annual Financial Report (CAFR) presents the financial position and results of
operations for the City operations of various funds, account groups, and component units. It is prepared
using “generally accepted accounting principles” (GAAP).

1. Under GAAP, the modified accrual basis of accounting is used for governmental (such as the General
Fund and special revenue funds) and agency funds. Under the modified accrual basis of accounting,
revenues are recorded when susceptible to accrual, i.e. both measurable and available.
Expenditures are recorded when the related fund liability is incurred.

2. Under GAAP, the accrual basis of accounting is used for proprietary fund types (enterprise funds)
and nonexpendable trust funds. Under the accrual basis of accounting, revenues are recognized
when earned, and their expenses are recognized when they are incurred.

3. Under GAAP, a government wide financial statement is prepared using accrual basis of accounting.
In the government wide financial statement, certain governmental funds are grouped together for
reporting purposes

Basis of Budgeting:
The City’s budget preparation conforms to GAAP by using a modified accrual basis for preparing the
operating budgets for the general governmental and agency funds and the full accrual basis for
enterprise funds. However, the basis of budgeting differs from the basis of accounting in the following
areas:

1.The City’s CAFR includes the Chesapeake Economic Development Authority, the Chesapeake Port
Authority, and the Chesapeake Airport Authority as component entities. The Operating and Capital
Improvement Budgets do not include estimated revenues and appropriations for the operation of
the three authorities. The portion of the revenues derived from City General Fund support of these
agencies is reflected in the Operating Budget.

2. The estimated revenues and appropriations in the Community Renewal Fund are not included in the
estimated revenue and appropriations for the Operating Budget or in the Capital Improvement
Budget. The Community Renewal Fund includes revenue from the Community Development Block
Grant (CDBG) and the HOME grant. The CDBG and HOME grant are appropriated by Council outside
the annual Operating and Capital Improvement Budget cycles.

3. The Capital Projects Funds, Utility Construction Funds, and the Community Renewal Fund budgets
are adopted on a five-year project basis instead of a fiscal year basis. The first year of the plan is
appropriated as the Capital Budget for each fiscal year.

4.The purchase of capital outlay is included in the budget in the year of the initial purchase at full cost;
capital outlay is not budgeted as a depreciation expense.

5.The budget includes purchase orders and similar encumbrances that are recognized as expenditures
in the CAFR in a subsequent year.