SFAS No. 106 costs and costs allowable in rates, would only be appropriate if future rate recovery of the regulatory asset is probable, as defined in SFAS No. 5. In order to provide authoritative guidance as to the appropriate accounting and what constitutes sufficient evidence that a regulatory asset exists, the EITF created Issue No. 92-12, “Accounting for OPEB Costs by Rate-Regulated Enterprises.” The EITF reached a final consensus for Issue No. 92-12 that a regulatory asset related to SFAS No. 106 costs should not be recorded in a regulated utility’s financial statements if the regulator continues to limit inclusion of OPEB costs in rates to a pay-as-you-go basis. Several EITF mem- bers noted that the application of SFAS No. 71 for financial reporting purposes requires that a rate- regulated enterprise’s rates be designed to recover the specific enterprise’s costs of providing the regulated service or product and that enterprise’s cost of providing a regulated service or product includes SFAS No. 106 costs. Further, the EITF reached a final consensus in Issue No. 92-12 that a rate-regulated enterprise should not recognize a regulatory asset for financial reporting purposes for the difference be tween SFAS No. 106 costs and OPEB costs included in the regulated utility’s rates unless the company (a) determines that it is probable that future revenue in an amount at least equal to the deferred cost (reg- ulatory asset) will be recovered in rates and (b) meets all four of the following criteria: 1. The regulated company’s regulator has issued a rate order, including a policy statement or a generic order applicable to enterprises within the regulator’s jurisdiction, that allows the de- ferral of SFAS No. 106 costs and subsequent inclusion of those deferred costs in rates. 2. Annual SFAS No. 106 costs, including normal amortization of the transition obligation, should be included in rates within approximately five years of SFAS No. 106 adoption. The change to full SFAS No. 106 in rates may take place in multiple steps, but the deferral period should not exceed approximately five years. 3. The combined deferral and recovery period approved by the regulator should not exceed ap- proximately 20 years. If a regulator approves a total deferral and recovery period of more than 20 years, a regulatory asset should not be recognized for any costs not recovered by the end of the approximate 20-year period. 4. The percentage increase in rates scheduled under the regulatory recovery plan for each fu- ture year should be no greater than the percentage increase in rates scheduled under the plan for each immediately preceding year. This criterion is similar to that required for phase-in plans in paragraph 5(d) of SFAS No. 92. The EITF observed that recovery of the regulatory asset in rates on a straight-line basis would meet this criterion. (d) OTHER FINANCIAL STATEMENT DISCLOSURES (i) Purchase Power Contracts. Many utilities enter into long-term contracts for the purchase of electric power in order to meet customer demand. The SEC’s SAB No. 28 (currently cited as SAB Topic 10D) sets forth the disclosure requirements related to long-term contracts for the purchase of electric power. This release states: The cost of power obtained under long-term purchase contracts, including payments required to be made when a production plant is not operating, should be included in the operating ex- penses section of the income statement. A note to the financial statements should present information concerning the terms and significance of such contracts to the utility company in- cluding date of contract expiration, share of land output being purchased, estimated annual cost, annual minimum debt service payment required and amount of related long-term debt or lease obligations outstanding. Purchasers of power under contracts that specify a level of power to be made available for a specific time period usually account for such contracts as purchase commitments with no recogni- tion of an asset for the right to receive power and no recognition of a liability for the obligation to 31.11 OTHER SPECIALIZED UTILITY ACCOUNTING PRACTICES 31 • 37 make payments (that is, the contracts are accounted for as executory agreements). However, some power purchase contracts may have characteristics similar to a lease in that the contract confers to the purchaser the right to use specific property, plant, and equipment. The determination of whether a power purchase contract is an executory agreement or a lease is a judgmental decision based on the substance of the contract. The fact that an agreement is labeled a “power purchase agreement” is not conclusive. If a contract “conveys the right to use property, plant and equipment,” the contract should be accounted for as a lease. Other power purchase contracts should be accounted for as executory agreements with disclosure as required by SFAS No. 47, “Dis- closure of Long-Term Obligations.” (ii) Financing Through Construction Intermediaries. Utilities using a construction inter medi- ary should include the intermediary’s work-in-progress in the appropriate caption of util ity plant on the balance sheet. SAB No. 28 (currently cited as SAB Topic 10A) requires the related debt to be dis- closed and included in long-term liabilities. Capitalized interest included as part of an intermediary’s construction work-in-progress should be recognized as interest expense (with an offset to AFUDC- debt) in the income statement. A note to the financial statements should describe the organization and purpose of the intermedi- ary and the nature of its authorization to incur debt to finance construction. The note should also dis- close the interest rate and amount of interest capitalized for each period in which an income statement is presented. (iii) Jointly Owned Plants. SAB No. 28 (currently cited as SAB Topic 10C) also requires a util- ity participating in a jointly owned power station to disclose the extent of its interests in such plant(s). Disclosure should include a table showing separately for each interest the amount of utility plant in service, accumulated depreciation, the amount of plant under construction, and the propor- tionate share. Amounts presented for plant in service may be further subdivided into subcategories such as production, transmission, and distribution. Information concerning two or more generating plants on the same site may be combined if appropriate. Disclosure should address the participant’s share of direct expenses included in operating expenses on the income statement (e.g., fuel, maintenance, other operating). If the entire share of direct expenses is charged to purchased power, then disclosure of this amount, as well as the proportionate amounts related to specific operating expenses on the joint plant records, should be indicated. A typical footnote is as follows: (x) Jointly Owned Electric Utility Plant Under joint ownership agreements with other state utilities, the company has undivided owner- ship interests in two electric generating stations and related transmission facilities. Each of the respective owners was responsible for the issuance of its own securities to finance its portion of the construction costs. Kilowatthour generation and operating expenses are divided on the same basis as ownership with each owner reflecting its respective costs in its statements of income. Information relative to the company’s ownership interest in these facilities at December 31, 19XX, is as follows: Unit 1 Unit 2 Utility plant in service $XXX,XXX% $XX,XXX% Accumulated depreciation $XXX,XXX% $XX,XXX% Construction work-in-progress $XXX,XXX% $XX,XXX% Plant capacity—Mw XXX% XXX% Company’s share XX% XX% In-service date 1974% 1981% 31 • 38 REGULATED UTILITIES (iv) Decommissioning Costs and Nuclear Fuel. In January 1978, the SEC published SAB No. 19 (currently cited as Topic 10B), which addressed estimated future costs of storing spent nuclear fuel as well as decommissioning costs of nuclear generating plants. SAB No. 19 requires footnote disclosure of the estimated decommissioning or dismantling costs and whether a provision for these costs is being recorded/recognized in rates. If decommissioning or dismantling costs are not being provided for, disclosure of the reasons for not doing so and the potential financial statement impact should be made. The term “decommissioning” means to safely remove nuclear facilities from service and reduce residual radioactivity to a level that permits termination of the Nuclear Regulatory Commission (NRC) license and release of the property for unrestricted use. The NRC has issued regulations re- quiring affected utilities with nuclear generation to prepare formal financial plans providing assur- ance that decommissioning funds in an amount at least equal to prescribed minimums will be accumulated prospectively over the remaining life of the related nuclear power plant. The NRC minimum is based on decontamination of the reactor facility but not demolition and site restoration. The amounts are based on generic studies and represent the NRC’s estimate of the minimum funds needed to protect the public safety and are not intended to reflect the actual cost of decommission- ing. Companies making annual sinking fund contributions are required by the NRC to maintain ex- ternal trust funds. SFAS No. 107, “Disclosure About Fair Value of Financial Instruments,” and SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” should be ad- dressed with respect to decommissioning trusts. Financial reporting considerations related to nuclear decommissioning costs have been re- solved with the issuance of SFAS No. 143, “Accounting for Asset Retirement Obligations.” Gen- erally, the estimated decommissioning obligation for nuclear power plants has been recognized over the life of the plant as a component of depreciation. SFAS No. 143 changes this practice. In- stead, an amount for an asset retirement obligation, such as for the decommissioning of a nuclear power plant, is recognized when it is incurred and displayed as a liability. The asset retirement cost is capitalized as part of the plant asset’s carrying amount and subsequently allocated to ex- pense over that asset’s useful life. SFAS No. 143 includes special provisions for entities that apply SFAS No. 71. Differences between amounts collected through rates and amounts recog- nized in accordance with SFAS No. 143 should be recognized as regulatory assets and liabilities, if the requirements of SFAS No. 71 are met. SFAS No. 143 is effective for financial statements is- sued for fiscal years beginning after June 15, 2002. SAB No. 19 also suggests disclosure of the estimated future storage or disposal costs for spent fuel recorded as nuclear fuel amortization. The note should also disclose whether estimated future storage or disposal costs and residual salvage value recognized in prior years are being recovered through a fuel clause or through a general rate increase. (v) Securitization of Stranded Costs, Including Regulatory Assets. In connection with the electric industry restructuring efforts that occurred in a number of states, the legislative or regula- tory framework for moving to a competitive marketplace includes provisions for the affected com- panies to securitize all or a portion of their stranded costs. Generally, such provisions establish a separate revenue stream/tariff that would be the source of recovery from a company’s rate payers for the stranded costs. Ultimately, the company would “sell” the stranded costs to a credit-en- hanced, bankruptcy remote special-purpose entity or trust established to finance the purchase through the sale of state authorized debt. Collections of the tariff by the company would be passed through to holders of the debt as periodic payments of interest and principal. The transaction would be structured with the objectives of being treated as a sale for bankruptcy purposes and as a bor- rowing for tax purposes. The potential benefits to a company from securitizing stranded costs include the opportunity to improve credit quality and to use the proceeds to reduce leverage and fixed charges, or fund the termination of uneconomic contracts. Rate payers should ultimately benefit though lower rates. 31.11 OTHER SPECIALIZED UTILITY ACCOUNTING PRACTICES 31 • 39 In February 1997, the SEC’s Office of Chief Accountant provided financial reporting guid- ance jointly to California’s utility registrants for proceeds received in connection with a stranded cost securitization. The SEC staff concluded that the proceeds received should be clas- sified as either debt or deferred revenue based on the guidance in EITF Issue No. 88-18, “Sales of Future Revenues.” EITF Issue No. 88-18 reached a consensus that the presence of any one of six specifically identified factors independently creates a rebuttable presumption that classification of the pro- ceeds as debt is appropriate. The facts and circumstances of stranded cost securitization trans- actions will typically result in the presence of one or more of the factors set forth in Issue No. 88-18. Thus, securitization proceeds are expected to be classified as debt for financial reporting purposes. Issue No. 88-18 also concluded that amounts recorded as debt should be amortized under the in- terest method. Generally, this will result in an increasing amount of stranded cost recognition in in- come statements during the securitization period. This occurs because the amount recognized will be equal to the principal portion (on a mortgage basis) of the tariffed debt service cost that is billable to customers and recorded as revenue during each period. In connection with providing classification guidance, the SEC staff also concluded that regula- tory assets are not financial assets under SFAS No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” which was subsequently replaced by SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Li- abilities.” Further, the legislation that provides for the securitization of regulatory assets simply al- lows the utility’s regulator to impose a tariff on electricity sold in the future. The law, however, does not transpose regulatory assets into financial assets. The basis for the SEC staff’s conclusion is that the resulting law creates an enforceable right (which is a right imposed on one party by an- other, such as a property tax) and not a contractual right. The SEC staff, after consulting with the FASB staff, concluded that the FASB specifically limited financial assets to a contractual right, which is essentially a subset of an enforceable right. Thus, enforceable rights that are not contrac- tual rights do not meet the definition of a financial asset under SFAS Nos. 125 and 140. The SEC staff also concluded that the proceeds received by the utility do not represent cash for assets sold, but cash received for future services. This approach seems to preclude accounting for this type of a transaction as any kind of a sale outside of SFAS Nos. 125 and 140. Although the above conclusion is based on the facts and circumstances of a specific transaction, the SEC staff indicated that it is doubtful whether this type of transaction could be altered enough to get a different answer. (vi) SFAS Nos. 71 and 101—Expanded Footnote Disclosure. The current relevance of SFAS No. 71 is a much discussed financial reporting topic for rate-regulated enterprises. In SEC staff com- ment letters, rate-regulated registrants are typically requested to discuss and quantify the effect on the company’s financial statements of the application of SFAS No. 71, and what the impact would be of discontinuing SFAS No. 71. Factors that make such discussions meaningful include: (1) deregula- tion and resulting competition for a variety of services; (2) discounting of approved tariffs; (3) rate designs or new forms of regulation that are not based on the cost of providing utility service; (4) crit- icism of continual cost deferrals under the provisions of SFAS No. 71 and the financial difficulties experienced by certain entities with significant deferrals; and (5) actual and expected discontinua- tions of application of SFAS No. 71 by a growing number of entities, particularly telecommunication companies. An example of the footnote disclosure being represented by the SEC staff follows. NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Regulatory Assets and Liabilities: The Company is subject to the provisions of Statement of Financial Accounting Standards 71, “Accounting for the Effects of Certain Types of Regulation.” Regulatory assets represent proba- ble future revenue to the Company associated with certain costs that will be recovered from cus- 31 • 40 REGULATED UTILITIES tomers through the rate-making process. Regulatory liabilities represent probable future reduc- tions in revenues associated with amounts that are to be credited to customers through the rate- making process. Regulatory assets and liabilities reflected in the Consolidated Balance Sheets as of December 31 (in thousands) relate to the following: 19XX 19XX Deferred income taxes $XXX,XXX) $XXX,XXX) Deferred income tax credits (X,XXX) (X,XXX) Energy efficiency costs XX,XXX) XX,XXX) Order 636 transition costs XX,XXX) X,XXX) Debt financing costs XX,XXX) X,XXX) Plant costs XX,XXX) XX,XXX) Postretirement benefit costs XX,XXX) XX,XXX) Nuclear plant outage costs X,XXX) — Rate case costs XXX ) X,XXX) Environmental costs X,XXX) X,XXX) Overrecovered fuel adjustment clause (X,XXX) (X,XXX) $XXX,XXX) $XXX,XXX) As of December 31, 19XX, $XXX,XXX of the Company’s regulatory assets and all of its regu- latory liabilities are being reflected in rates charged to customers over periods ranging from 5 to 28 years. The Company intends to request recovery of its remaining regulatory assets in a general rate case filing expected in 19XX. For additional information regarding deferred income taxes, Order 636 transition costs, environmental costs, and postretirement benefit costs, see footnotes 3, 4(e), 4(f), and 12, respectively. If a portion of the Company’s operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery (refund) continues through rates established and collected for the Com- pany’s remaining regulated operations. In addition, the Company would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. 31.12 SOURCES AND SUGGESTED REFERENCES Accounting Principles Board, “Accounting for the ”Investment Credit,”’APB Opinion No. 4. AICPA, New York, 1964. , “Accounting for Income Taxes,” APB Opinion No. 11. AICPA, New York, 1967. , “Accounting Changes,” APB Opinion No. 20. AICPA, New York, 1971. , “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” APB Opinion No. 30. AICPA, New York, 1973. Amble, Joan L., and Cassel, Jules M., “A Guide to Implementation of Statement 87 on Employers’ Accounting for Pensions.” FASB, Stamford, CT, 1986. American Institute of Certified Public Accountants, “Restatement and Revision of Accounting Research Bul- letins,” Accounting Research Bulletin No. 43. AICPA, New York, 1953. , “Declining-Balance Depreciation,” Accounting Research Bulletin No. 44. AICPA, New York, July 1958. , “Consolidated Financial Statements,” Accounting Research Bulletin No. 51. AICPA, New York, August 1959. Financial Accounting Standards Board, “Official Minutes of the Emerging Issues Task Force Meeting.” FASB, Norwalk, CT, February 23, 1989. , “Accounting for Contingencies,” Statement of Financial Accounting Standards No. 5. FASB, Stamford, CT, 1975. , “Prior Period Adjustments,” Statement of Financial Accounting Standards No. 16. FASB, Stamford, CT, 1977. 31.12 SOURCES AND SUGGESTED REFERENCES 31 • 41 , “Capitalization of Interest Cost,” Statement of Financial Accounting Standards No. 34. FASB, Stam- ford, CT, 1979. , “Accounting for the Effects of Certain Types of Regulation,” Statement of Financial Accounting Stan- dards No. 71. FASB, Stamford, CT, 1982. , “Accounting for OPEB Costs by Rate-Regulated Enterprises,” Issue No. 92-12. Financial Accounting Standards Board, Emerging Issues Task Force, Norwalk, CT, January 1993. , “Employers’ Accounting for Postretirement Benefits Other Than Pension,” Statement of Financial Ac- counting Standards No. 106. FASB, Stamford, CT, December 1990. , “Accounting for Regulatory Assets,” Issue No. 93-4. Financial Accounting Standards Board, Emerging Issues Task Force, Norwalk, CT, March 1993. , “Accounting for Income Taxes,” Statement of Financial Accounting Standards No. 109. FASB, Nor- walk, CT, February 1992. , “Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative Revenue Programs,” Issue No. 92-7. Financial Accounting Standards Board, Emerging Issues Task Force, Norwalk, CT, July 1992. , “Regulated Enterprises—Accounting for Abandonments and Disallowances of Plant Costs,” Statement of Financial Accounting Standards No. 90. FASB, Stamford, CT, 1986. , “Regulated Enterprises—Accounting for Phase-in Plans,” Statement of Financial Accounting Standards No. 92. FASB, Stamford, CT, 1987. , “Regulated Enterprises—Accounting for the Discontinuation of Application of FASB Statement No. 71,” Statement of Financial Accounting Standards No. 101. FASB, Norwalk, CT, 1988. , “Accounting for Asset Retirement Obligations,” Statement of Financial Accounting Standards No. 143, FASB, Norwalk, CT, June 2001. , “Accounting for the Impairment or Disposal of Long-Lived Assets,” Statement of Financial Accounts Standards No. 144, FASB, Norwalk, CT, August 2001. , “Computation of a Loss on an Abandonment,” FASB Technical Bulletin No. 87-2. FASB, Stamford, CT, December 1987. , “Deregulation of the Pricing of Electricity—Issues Related to the Application of FASB Statements No. 71, “Accounting for the Effects of Regulation” and No. 101, “Regulated Enterprises—Ac counting for the Discontinuance of Application of FASB Statement No. 71,” Issue No. 97-4. Financial Accounting Stan- dards Board, Emerging Issues Task Force, Norwalk, CT, May, July 1997. Securities and Exchange Commission, “Interpretation Describing Disclosure Concerning Expected Future Costs of Storing Spent Nuclear Fuel and of Decommissioning Nuclear Electric Generating Plants,” Staff Account- ing Bulletin No. 19. SEC, Washington, DC, January 1978. , “Financing by Electric Utilities Through Use of Construction Intermediaries,” Staff Accounting Bul- letin No. 28. SEC, Washington, DC, December 1978. , “Utilities—Classification of Disallowed Costs or Costs of Abandoned Plants,” Staff Accounting Bul- letin No. 72. SEC, Washington, DC, November 1987. 31 • 42 REGULATED UTILITIES CHAPTER 32 STATE AND LOCAL GOVERNMENT ACCOUNTING Andrew J. Blossom, CPA KPMG Peat Marwick LLP Andrew Gottschalk, CPA KPMG Peat Marwick LLP John R. Miller, CPA, CGFM KPMG Peat Marwick LLP Warren Ruppel, CPA DiTomasso & Ruppel, CPAs 32.1 INTRODUCTION 3 32.2 THE NATURE AND ORGANIZATION OF STATE AND LOCAL GOVERNMENT ACTIVITIES 4 (a) Structure of Government 4 (b) Objectives of Government 4 (c) Organization of Government 4 (d) Special Characteristics of Government 5 32.3 SOURCE OF ACCOUNTING PRINCIPLES FOR STATE AND LOCAL GOVERNMENT ACCOUNTING 6 (a) National Council on Governmental Accounting 6 (b) Governmental Accounting Standards Board 6 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES 8 (a) Similarities to Private Sector Accounting 8 (b) Users and Uses of Financial Reports 9 (c) Summary Statement of Principles 11 (i) Government-Wide Financial Statements 11 (ii) Fund Accounting Systems 11 (iii) Types of Funds 11 (iv) Number of Funds 12 (v) Reporting on Nonexchange Transactions 12 (vi) Accounting for Fixed Assets and Long-Term Liabilities 16 (vii) Valuation of Fixed Assets 16 (viii) Depreciation of Fixed Assets 16 (ix) Accrual Basis in Governmental Accounting 16 (x) Budgeting, Budgetary Control, and Budgetary Reporting 16 (xi) Transfer, Revenue, Expenditure, and Expense Account Classification 17 32 • 1 This chapter was updated from the Ninth Edition by the editors. (xii) Common Terminology and Classification 17 (xiii) Interim and Annual Financial Reports 17 (d) Discussion of the Principles 17 (e) Legal Compliance 17 (f) Fund Accounting 18 (g) Types and Number of Funds 18 (i) General Fund 19 (ii) Special Revenue Funds 19 (iii) Debt Service Funds 20 (iv) Capital Projects Funds 22 (v) Permanent Funds 24 (vi) Enterprise Funds 24 (vii) Focus on Major Funds 26 (viii) Internal Service Funds 26 (ix) Trust and Agency Funds 27 (x) Special Assessment Activities 29 (h) Fixed Assets: Valuation and Depreciation 31 (i) Accounting for Acquisition and Disposal of Fixed Assets 32 (ii) Subsidiary Property Records 32 (iii) Disposal or Retirement of Fixed Assets 32 (iv) Depreciation 32 (i) Long-Term Liabilities 33 (i) Accounting for Long-Term Debt 33 (ii) Deficit Bonds 34 (j) Measurement Focus and Basis of Accounting 34 (i) Measurement Focus 34 (ii) Basis of Accounting 35 (iii) Revenue Transactions 35 (iv) Expenditure Transactions 36 (k) Budgetary Accounting 37 (i) Types of Operating Budgets 37 (ii) Budget Preparation 39 (iii) Budget Execution 41 (iv) Proprietary Fund Budgeting 44 (v) Capital Budget 45 (vi) New Budgetary Reporting Requirements 45 (l) Classification and Terminology 45 (i) Classification of Expenditures 45 (ii) Classifications of Other Transactions 46 (iii) Residual Equity Transfers 47 (iv) Classification of Fund Equity 47 (v) Investment in General Fixed Assets 47 (vi) Accounting Coding 47 (m) External Financial Reporting 48 (i) The Financial Reporting Entity 48 (ii) Pyramid Concept and General Purpose Financial Statements 49 (iii) Comprehensive Annual Financial Report 66 (iv) Certificate of Achievement Program 68 (v) Popular Reports 68 (n) Reporting Interfund Activity 68 (o) Required Reconciliation to Government-Wide Statements 69 (p) Reporting General Capital Assets 69 32.5 MANAGEMENT DISCUSSION AND ANALYSIS 70 32.6 GOVERNMENT-WIDE FINANCIAL STATEMENTS 71 (a) Focus of the Government- Wide Financial Statements 71 (b) Measurement Focus and Basis of Accounting 72 (i) Reporting Capital Assets 72 (ii) Methods for Calculating Depreciation 74 (c) Statement of Net Assets 74 (i) Invested in Capital Assets, Net of Related Debt 74 (ii) Restricted Net Assets 75 (iii) Unrestricted Net Assets 75 (iv) Reporting General Long- Term Liabilities 75 (d) Statement of Activities 75 (i) Expenses 76 (ii) Revenues 76 (iii) Special and Extraordinary Items 77 (e) Eliminations and Reclassifications 77 (f) Reporting Internal Service Fund Balances 78 (g) Statement of Net Assets Format 78 (h) Statement of Activities Format 78 32.7 NEW DISCLOSURE REQUIREMENTS 78 (a) General Disclosure Requirements 78 (b) Required Note Disclosures about Capital Assets and Long-Term Liabilities 82 32 • 2 STATE AND LOCAL GOVERNMENT ACCOUNTING 32.1 INTRODUCTION The rapid changes that have occurred in the environment of state and local governments during the past few years have prompted sweeping changes to governmental accounting practice and theory. The evolution of governmental accounting and reporting standards has made great strides since the forma- tion of the Governmental Accounting Standards Board (GASB) and the Single Audit Act of 1984. Re- lated to the changes is greater scrutiny by federal and state agencies as they begin to realize the importance of audit quality in the governmental environment. Governmental enterprises are no longer the “shoebox” operations imagined by many people. Rather, government is a large business—a very large business. Officials in government need to be and are much more sophisticated now than similar 32.1 INTRODUCTION 32 • 3 (c) Disclosures about Donor- Restricted Endowments 82 (d) Segment Information 82 32.8 REPORTING COMPONENT UNITS 83 32.9 REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MD&A 84 (a) New Budgetary Comparison Information 85 (b) Modified Approach for Reporting Infrastructure 85 32.10 BASIC FINANCIAL STATEMENTS REQUIRED FOR SPECIAL- PURPOSE GOVERNMENTS 86 (a) Reporting by Special-Purpose Governments Engaged in Governmental Activities 86 (b) Reporting by Special-Purpose Governments Engaged Only in Business-Type Activities 86 (c) Reporting by Special-Purpose Governments Engaged Only in Fiduciary Activities 86 32.11 TRANSITION TO THE REQUIREMENTS OF GASB STATEMENT NO. 34 87 (a) Reporting General Infrastructure Assets at Transition 87 (b) Transition to the Modified Approach for Reporting Infrastructure Assets 87 (c) Initial Capitalization of General Infrastructure Assets 87 (i) Determining Major General Infrastructure Assets 87 (ii) Establishing Capitalization at Transition 88 (iii) Estimating Acquisition Cost— Current Replacement Cost 88 (iv) Estimated Acquisition Cost from Existing Information 88 32.12 GRANT ACCOUNTING 88 (a) Definitions 88 (b) Fund Identification 88 (c) Revenue and Expenditure (Expense) Recognition 88 32.13 ACCOUNTING PRINCIPLES AND PRACTICES—PUBLIC COLLEGES AND UNIVERSITIES 89 32.14 AUDITS OF GOVERNMENTAL UNITS 89 (a) The Single Audit Act Amendments of 1996 90 (b) Other Considerations 92 (i) Governmental Rotation of Auditors 92 (ii) Audit Committees 92 32.15 PROPOSED CHANGES AND OTHER MATTERS 93 (a) Financial Reporting Model 93 (b) Other Issues at the GASB 93 (c) Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs 93 (d) Investment Valuation 94 (e) Audit Quality 94 (f) Summary 94 32.16 SOURCES AND SUGGESTED REFERENCES 94 APPENDIX 32.1: PRONOUNCEMENTS ON STATE AND LOCAL GOVERNMENT ACCOUNTING 95 personnel were only a few years ago. In other words, the increasing complexity of the governmental environment, the increasing demands for public accountability, and the challenges and opportunities that face today’s governments require accounting systems that provide fast, accurate, and timely in- formation to the government’s decision makers. Going forward and dealing with the challenges of issues like deteriorating infrastructure, an aging workforce, and public health care, including the AIDS epidemic, are likely to be key concerns of the individuals who operate the state and local governments. However, the nature and organization of a government’s daily activities form an important foundation that must be understood in order to deal with the greater challenges of the future. 32.2 THE NATURE AND ORGANIZATION OF STATE AND LOCAL GOVERNMENT ACTIVITIES (a) STRUCTURE OF GOVERNMENT. For the most part, government is structured on three lev- els: federal, state, and local. This chapter deals only with state and local governments. States are specific identifiable entities in their own right, but accounting at the state level is asso- ciated more often than not with the individual state functions, such as departments of revenue, re- tirement systems, turnpike authorities, and housing finance agencies. Local governments exist as political subdivisions of states, and the rules governing their types and operation are different in each of the 50 states. There are, however, three basic types of local governmental units: general purpose local governments (counties, cities, towns, villages, and town- ships), special purpose local governments, and authorities. The distinguishing characteristics of general purpose local governments are that they: • Have broad powers in providing a variety of government services, for example, public safety, fire prevention, public works • Have general taxing and bonding authority • Are headed by elected officials Special purpose local governments are established to provide specific services or construction. They may or may not be contiguous with one or more general purpose local governments. Authorities and agencies are similar to special purpose governments except that they have no tax- ing power and are expected to operate with their own revenues. They typically can issue only rev- enue bonds, not general obligations bonds. (b) OBJECTIVES OF GOVERNMENT. The purpose of government is to provide the citizenry with the highest level of services possible given the available financial resources and the legal re- quirements under which it operates. The services are provided as a result of decisions made during a budgeting process that considers the desired level and quality of services. Resources are then made available through property taxes, sales taxes, income taxes, general and categorical grants from the federal and state governments, charges for services, fines, licenses, and other sources. However, there is generally no direct relationship between the cost of the services rendered to an individual and the amount that the individual pays in taxes, fines, fees, and so on. Governmental units also conduct operations that are financed and operated in a manner similar to private business enterprises, where the intent is that the costs of providing the goods or services be fi- nanced or recovered primarily through charges to the users. In such situations, governments have many of the features of ordinary business operations. (c) ORGANIZATION OF GOVERNMENT. A government’s organization depends on its constitution (state level) or charter (local level) and on general and special statutes of state and local legislatures. When governments were simpler and did not provide as many services as 32 • 4 STATE AND LOCAL GOVERNMENT ACCOUNTING [...]... financial statements of certain special entities.” (Special entities are organizations that can either be privately or governmentally owned and include colleges and universities, hospitals, and utilities.) The Committee recommended that FASB be the primary accounting standard setter for these special entities when they issue separate, stand-alone financial statements and that GASB be allowed to require... whole and of the funds and account groups of the governmental unit in conformity with GAAP, which include full disclosure, and to provide adequately the required supplementary information, including management’s discussion and analysis (MD&A); and (2) determine and demonstrate compliance with finance-related legal and contractual provisions The requirements concerning the government as a whole and management’s... project type special assessment: 1 2 3 4 5 Levying the special assessment Issuing special assessment bonds Constructing the capital project Collecting the special assessment Paying the bond principal and interest Because the special assessment fund has been eliminated for financial reporting purpose, the transactions related to special assessment activities are typically reported in the same manner, and on... provided by the governmental entity and its ability to meet its obligations as they become due by: a Providing information about the financial position and condition of a governmental entity Financial reporting should provide information about resources and obligations, both actual and contingent, current and noncurrent, and about tax sources, tax limitations, tax burdens, and debt limitations b Providing... future plans and policies 3 Those Who Lend or Participate in the Lending Process—Investors and Creditors Investors and creditors include individual and institutional investors and creditors, municipal security underwriters, bond-rating agencies (Moody’s Investors Service, and Standard & Poor’s, etc.), bond insurers, and financial institutions The uses of a government’s financial reports are also different... current and noncurrent assets and liabilities and should display restricted assets (iv) Number of Funds Governmental units should establish and maintain those funds required by law and sound financial administration Only the minimum number of funds consistent with legal and operating requirements should be established, however, since unnecessary funds result in inflexibility, undue complexity, and inefficient... in which all applicable eligibility requirements have been met and the resources are available (vi) Accounting for Fixed Assets and Long-Term Liabilities A clear distinction should be made between (1) proprietary and similar trust fund fixed assets and general fixed assets and (2) proprietary and similar trust fund long-term liabilities and general long-term debt 1 Fixed assets related to specific proprietary... make it possible both: (a) to present fairly and with full disclosure the financial position and results of financial operations of the funds and account groups of the governmental unit in conformity with generally accepted accounting principles; and (b) to determine and demonstrate compliance with finance-related legal and contractual provisions Several state and local governments have accounting requirements... local government’s financial condition, that is, its financial position and its ability to continue to provide services and meet its obligations as they come due 32 10 • STATE AND LOCAL GOVERNMENT ACCOUNTING Investors and creditors need information about available and likely future financial resources, actual and contingent liabilities, and the overall debt position of a government to evaluate the government’s... measurable and available The fixed assets constructed or acquired (other than those related to an enterprise fund) should be reported in the general fixed assets account group, and the outstanding long-term debt should be reported in the general long-term debt account group The entry to record the special assessment levy is shown below Special assessments receivable Special assessment revenue Deferred special . FOR STATE AND LOCAL GOVERNMENT ACCOUNTING 6 (a) National Council on Governmental Accounting 6 (b) Governmental Accounting Standards Board 6 32.4 GOVERNMENTAL ACCOUNTING PRINCIPLES AND PRACTICES. Fixed Assets and Long-Term Liabilities 16 (vii) Valuation of Fixed Assets 16 (viii) Depreciation of Fixed Assets 16 (ix) Accrual Basis in Governmental Accounting 16 (x) Budgeting, Budgetary Control, and. Funds 26 (viii) Internal Service Funds 26 (ix) Trust and Agency Funds 27 (x) Special Assessment Activities 29 (h) Fixed Assets: Valuation and Depreciation 31 (i) Accounting for Acquisition and