April 1999
Volume 1 Issue 1
Governmental vs. Enterprise
Fund Accounting
n this, the inaugural edition of the
REAC’s PHA GAAP Flyer, the focus will be on governmental vs. enterprise fund accounting. The REAC, in consultation with some of the nation’s largest accounting firms, has concluded that in most, if not all
instances, PHAs should use enterprise fund accounting. The basis for the REAC’s position,
along with the compelling reasons why PHAs
should use enterprise fund accounting follows.
I
FUND ACCOUNTING
Exhibit 1: Fund Types
Governmental Funds
General fund
Special revenue funds
Capital project funds
Debt service funds
Proprietary (business-type)
Enterprise funds
Internal service funds
Fiduciary
Trust funds
Agency funds
In order to prepare financial statements that
comply with generally accepted accounting principles (GAAP), PHAs and their auditors must be
familiar with two key concepts:
1) fund accounting and 2) the
basis of accounting and measurement focus used by funds.
According to the National
Council on Governmental Accounting Statement No. 1
(NCGAS 1), entitled Governmental Accounting and Financial Reporting Principles, a
fund is defined as:
In addition to the eight funds
types listed in Exhibit 1, two
account groups are reported
by governments – the general
fixed asset account group and
the general long-term debt
account group.
“The REAC, in consultation
with some of the nation’s largest
accounting firms, has concluded
that in most, if not all instances,
PHAs should use enterprise fund
accounting.”
“…a self-balancing set of accounts recording cash and
other financial resources, together with all related liabilities and residual equities or balances, and
changes therein, which are segregated for the
purpose of carrying on specific activities or
attaining certain objectives in accordance with
special regulations, restrictions, or limitations.”
Under governmental GAAP there are eight different fund types which are categorized into
three different activities: governmental, proprietary (i.e. business type), and fiduciary. The
eight funds, by category, are listed in Exhibit 1.
Governmental Funds
GAAP requires state and local
governments to use governmental funds to account for
“governmental-type activities”. Governmental-type activities include services largely funded through
non-exchange revenues (taxes are the most common example). When state and local governments employ governmental fund accounting,
the general fund is used to account for all financial resources of the government except for
those required to be accounted for in another
fund. Under GAAP, a compelling reason must
exist before another fund type is utilized. The
two account groups provide what are essentially
listings of the governmental funds’ long-term
assets and liabilities. Page 2
PHA GAAP Flyer
April 1999
Enterprise Funds
Measurement Focus
GAAP requires state and local governments to use the enterprise fund type to account for “business-type activities” –
activities similar to those found in the private sector. Businesstype activities include services primarily funded through user
charges.
Measurement focus determines what transactions will be reported in the various funds’ operating statement. The differences in the measurement focus of governmental vs. enterprise
funds is highlighted in Exhibit 2.
NCGAS 1 defines the purpose of enterprise funds as:
“…to account for operations (a) that are financed and operated in a manner similar to private business enterprises —
where the intent of the governing body is that the costs
(expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed
or recovered primarily through users charges; or (b) where the
governing body has decided that periodic determination of
revenues earned, expenses incurred, and/or net income is
appropriate for capital maintenance, public policy, management control, accountability, or other purposes.”
Exhibit 2: Measurement Focus
Governmental funds use a measurement focus known as
2
the flow of current financial resources. This focus
measures financial resources available to the entity in the
near future as a result of transactions and events of the
fiscal period reported. Therefore, long-term assets and
liabilities will not be reflected on the balance sheets of
governmental funds.
Enterprise funds use a measurement focus known as the
3
flow of economic resources. This measurement focus is
generally the same as that used by commercial entities.
Both long-term assets and liabilities are reported on the
balance sheet of enterprise funds.
State and local governments should use an enterprise fund to
account for its activities when the criteria of either (a) or (b) are
met. In most cases, PHAs should use enterprise funds because
their activities closely resemble the characteristic described in
(a) above. Moreover, it is important to note that the total cost
of the activity does not have to be paid for by the user charges.
The government (or other governmental
entity – in this case HUD) may subsidize a
“GAAP requires state and local
significant portion of the costs of the entergovernments to use the enterprise
prise fund.
fund type to account for “businesstype activities” – activities similar
to those found in the private
BASIS OF ACCOUNTING AND
sector.”
MEASUREMENT FOCUS
The two most important distinguishing features of governmental accounting and financial reporting are the basis of accounting and measurement focus used. Not all funds of a government use the same basis of accounting and measurement focus,
further distinguishing and complicating governmental accounting and financial reporting. A simple rule of thumb is that the
basis of accounting determines when transactions will be
recorded and the measurement focus determines what transac1
tions will be recorded.
Basis of Accounting
Basis of accounting refers to when revenues, expenditures,
expenses, and transfers (and the related assets and liabilities)
are recognized and reported in the financial statements. Examples of accounting basis include cash, tax, accrual, and modified accrual. Essentially, the basis of accounting deals with
timing issues. Government funds use the modified accrual
basis of accounting. Enterprise funds use the accrual basis of
accounting.
COMPELLING REASONS
WHY PHAs SHOULD USE ENTERPRISE ACCOUNTING
Included in Exhibit 3 is a list of seven
compelling reasons why PHAs should use
enterprise fund accounting.
Exhibit 3: Reasons to use Enterprise Funds
1
PHAs activities meet the definition of an enterprise
fund under NCGAS 1.
2 PHAs operate property development/management
concerns similar to companies in the private sector.
Therefore, PHAs operations are “business-type
activities”.
3 PHAs do not have the authority or the ability to raise
taxes. Thus, the flow of current financial resources
focus does not apply to PHAs.
4 The enterprise fund type works better than the
governmental fund type for PHAs that participate in
joint ventures and mixed financing transactions.
5 Equity in fixed assets is an important item to
consider when evaluating PHAs.
6 More accountants are familiar with full accrual
accounting than modified accrual accounting.
GASBS 20 requires PHAs to use proprietary fund
accounting.
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PHA GAAP Flyer
April 1999
is an important item to consider when evaluating that
entity’s financial condition (i.e. a PHA should have net
equity in its fixed assets). The governmental model does
not measure this element.
A detailed explanation of each of the compelling reasons
follows:
•
•
It is HUD’s position that a typical PHA’s activities meet
the definition of an enterprise fund under NCGAS 1 (see
previous discussion on enterprise funds).
In essence, PHAs are property development/management
concerns and, therefore, should be managed and accounted
for in a manner similar to their private sector counterparts.
In fact, the only major difference between PHAs and
private sector development/
management concerns is that
HUD, rather than the tenants,
fund some of the PHA’s costs.
As previously noted, the total
cost of a state or local
government’s activity does not
have to be paid for by user
charges. Another governmental
entity (such as HUD) may
subsidize a significant portion of
those costs. Thus, a PHA’s
operations are “business-type
activities” similar to those found
in the private sector.
•
More accountants and auditors are familiar with the full
accrual basis of accounting and flow of economic
resources measurement focus than are familiar with the
modified accrual basis/flow of current resources focus.
Therefore, the number of qualified accounting resources
available to PHAs increases when the enterprise fund type
is utilized.
• The
Governmental Accounting
Standards Board (GASB) Statement
20, Accounting and Reporting for
Proprietary Funds and Other
Governmental Entities that use
Proprietary Fund Accounting provides
PHAs with interim guidance on
business-type accounting and financial
reporting for proprietary activities.
Paragraph 5 of GASBS 20 states:
“The requirements of this statement
apply to accounting and financial
reporting for proprietary activities –
that is, proprietary funds and other
governmental entities that use
proprietary fund accounting including
public benefit corporations and
authorities (emphasis added)...”.
•
PHAs do not have the authority
or the ability to raise taxes to
increase their resources in future
years. For example, unlike state
and local governments, PHAs
can not raise taxes to cover long“The trend in governmental accounting is
Accordingly, it is HUD’s position that
term debt obligations.
PHAs
toward the full accrual basis and flow of
most, if not all PHAs are covered by
must rely on each year’s funds to
economic resources measurement focus.
GASBS 20 and, therefore, should use
support that year’s operations.
By utilizing the enterprise fund type, PHA
enterprise fund accounting.
As a result, a PHA’s focus should
will be better prepared to implement
be on whether the entity is
GASBS 11.”
As further outlined in the Current
economically better off as a result
Developments section below, the trend
of the events and transactions that
in governmental accounting is toward the full accrual basis of
have occurred during the fiscal year reported. In other
accounting and flow of economic resources measurement
words, PHAs have an economic flow of resources focus
focus. By utilizing the enterprise fund type, PHAs will be
rather than a current flow of resources focus. Therefore,
better prepared to implement GASBS 11.
PHAs should use the full accrual method of accounting
and report both long-term assets and liabilities on their
CURRENT DEVELOPMENTS
balance sheets.
•
The enterprise fund type works better than the
governmental fund type for PHAs that participate in joint
ventures and mixed financing transactions. Enterprise
funds are allowed to follow FASB pronouncements unless
those pronouncements conflict with or contradict GASB
pronouncements. FASB guidance in this area is more
clearly defined than that of the GASB.
•
It is HUD’s position that a PHA’s equity in its fixed assets
During May 1990, the Governmental Accounting Standards
Board (GASB) issued Statement 11, Measurement Focus and
Basis of Accounting – Governmental Fund Operating
Statements. During June 1993 the GASB issued GASBS 17,
Measurement Focus and Basis of Accounting -- Governmental
Fund Operating Statements: Amendment of the Effective Dates
of GASB Statement No. 11 and Related Statements -- an
amendment of GASB Statements No. 10, 11, and 13, which
deferred indefinitely the effective date of GASBS 11. Page 4
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PHA GAAP Flyer
April 1999
A key provision of GASBS 11 included a requirement that
governments report activities in the governmental funds using
the accrual basis of accounting and the flow of financial
resources measurement focus.
deliberation it appears that the GASB is close to finalizing the
new reporting model. In fact, the GASB’s First-Quarter 1999
Technical Plan indicates that the Board is on track to issue the
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new reporting model Statement in June 1999.
During January 1997, the GASB issued an Exposure Draft
(ED) titled Basic Financial Statements and Management’s
Discussion and Analysis for State and Local Governments.
The reporting model that may result from this ED is far
different from those originally contemplated when GASBS 11
was first issued. If issued as a GASB pronouncement, the ED
would require governments to prepare financial statements
from both an entity-wide perspective and a fund perspective.
CONCLUSION
Entity-Wide Perspective
The trend in governmental accounting is headed toward the full
accrual basis of accounting and the flow of economic resources
measurement focus. The compelling reasons listed above make
it abundantly clear that in most, if not all cases, PHAs should
utilize the enterprise fund type when preparing their financial
statements in accordance with generally accepted accounting
principles. Furthermore, by converting from HUD’s regulatory
basis of accounting directly to the enterprise fund type, PHAs
will find it easier to implement GASBS 11, when it becomes
effective.
______________________________
Entity-wide financial statements would provide information
about the primary government and its component units without
displaying funds or fund types. The financial statements would
1 Wiley GAAP for Governments 1999, page 55, John Wiley & Sons, Inc.
1999.
distinguish between the governmental
2 Wiley GAAP for Governments 1999, page 58, John
“All information would be
and business-type activities of the
Wiley & Sons, Inc. 1999.
reported using the economic
primary government and between the
3 Wiley GAAP for Governments 1999, page 58, John
resources measurement focus and
total primary government and its
Wiley & Sons, Inc. 1999.
the accrual basis of accounting as
4 GASB Exposure Draft, January 31, 1997.
discretely presented component units.
5 GASB Exposure Draft, January 31, 1997.
enterprise funds do today.”
(The entity-wide perspective would not
6 Wiley GAAP for Governments 1999, page 12, John
include fiduciary activities.)
All
Wiley & Sons, Inc. 1999.
information would be reported using the economic resources
7 GASB Action Report, No. 166, January 1999, Vol. 16, No.1.
measurement focus (emphasis added) and the accrual basis of
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accounting (emphasis added), as enterprise funds do today.
Fund Perspective
Fund perspective financial statements would provide
information about the primary government’s fund types,
including fiduciary funds and blended component units.
Governments would present separate financial statements for
each fund category – governmental, proprietary, higher
education, and fiduciary – and would no longer present a
combined balance sheet. (General capital assets and general
long-term liabilities currently reported in account groups would
be reported only at the entity-wide perspective, as assets and
liabilities of governmental activities.) As is currently required,
governmental fund financial statements would focus on fiscal
accountability and would report the flows and balances of
current financial resources (emphasis added) using the
modified accrual basis of accounting (emphasis added).
Proprietary and fiduciary fund financial statements would
report operating results and financial position using the
economic resources measurement focus and the accrual basis
of accounting. The fund perspective also would include
5
component units that are fiduciary in nature.
Current Status
In response to this ED, the GASB has received a significant
number of comment letters and has also heard public testimony
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at meetings throughout the summer of 1997. After much
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