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Glenn Hegar  ·  Texas Comptroller of Public Accounts

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Governmental Reporting Overview
Proprietary Funds

Financial statements used to present proprietary funds:

  • Statement of net position
  • Statement of revenues, expenses and changes in net position
  • Statement of cash flows

Present fund financial statements for proprietary funds using the economic resources measurement focus and the full accrual basis of accounting. For hard-copy AFRs, agencies present individual proprietary funds in separate columns, whereas universities must aggregate funds into a single column. Display a combined total column for all enterprise funds.

GASB 34 requires the following format presentation on the fund financial statements for proprietary funds:

  • Capital contributions, additions to permanent and term endowments, special and extraordinary items and transfers are reported above the increase (decrease) in net position.
  • Present special and extraordinary items separately at the bottom of the statement. For more information, see Governmental Funds.

Present the statement of cash flows for proprietary funds using the direct method of cash flows from operating activities. The statement must include a reconciliation of operating cash flows to operating income. For more information on the statement of cash flows, see Statement of Cash Flows and Instructions for the ACFR Web Application.

The proprietary fund category includes enterprise and internal service funds. Proprietary fund reporting focuses on:

  • Determination of operating income
  • Changes in net position (or cost recovery)
  • Financial position
  • Cash flows

Accrual accounting attempts to record a transaction’s financial effects in the period that the transaction occurred — rather than when the cash was received or paid by the agency. Revenues are recorded when earned or when the agency has a right to receive the revenues. Expenses are recognized when incurred. The date related cash was received or paid is of no consequence.

Four essential elements of accrual accounting:

  • Recognition of expenditures when incurred and the subsequent amortization of the deferred outflows
  • Recognition of revenues when earned
  • Capitalization of certain expenses and the subsequent depreciation of the capitalized costs
  • Accruals of revenues earned and expenses incurred

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Measurement Focus for Proprietary Funds [+]

Proprietary funds use the flow of economic resources measurement focus — a focus similar to that used by commercial entities. Proprietary funds focus on whether or not the enterprise is economically better off as a result of the events and transactions that occurred during the fiscal period reported.

Report transactions and events that:

  • Improved an enterprise’s financial position — reported as revenues or gains
  • Diminished the economic position of the enterprise — reported as expenses or losses

Present both current and long-term assets and liabilities on the statement of net position for proprietary funds.

Operating vs. Non-Operating Revenues/Expenses [+]

The proprietary statement of revenues, expenses and changes in net position is segregated into operating and non-operating sections.

Generally, operating activities are those that are either:

  • The direct result from the provision of goods and services to customers
  • Directly related to the principal and usual activity of a fund

GASB 34 does not specifically provide a definition of operating revenues and expenditures. However, per GASB 34, paragraph 102, when defining a proprietary fund’s operating revenues and expenditures, for consistency purposes, agencies should consider how individual transactions are classified on the statement of cash flows. For more information, refer to GASB 9.

Reporting of Loan Activities

Loan activities are generally classified as investing activities.

Exception to the general rule: Certain loan programs (such as low-income housing and student loan programs) are not intended to be investments, but are undertaken instead to fulfill a governmental responsibility and directly provide a benefit to individual constituents. Per GASB 9, paragraph 19, these “program loans” are classified as operating activities on the statement of cash flows. Therefore, it is appropriate for the agency to report transactions related to these program loans as part of their operating activities section on the statement of revenues, expenses and changes in net position.

Note: GASB expects few types of loan programs or finance authorities to meet the spirit of the exception.

Reporting of Grants

Generally, grants are treated as subsidies and are therefore categorized as either:

  • Capital and related financing activities
  • Noncapital financing activities

However, GASB recognizes that certain arrangements called “grants” are essentially the same as contracts for services. In order for a “grant” to be considered a contract for service, the grant would have to finance a program that the agency would not otherwise undertake. Therefore, the grant is not subsidizing an existing program but rather reimbursing the costs of a new program whose activity is inherently part of the operations of the grantor.

Enterprise Fund (Fund Type 05) [+]

Use enterprise funds to report any activity for which a fee is charged to external users (for example, citizens) for goods and services. Agencies must report activities in enterprise funds if any one of the following criteria is met. Review the activity’s principal revenue sources in applying the criteria.

  • The activity is financed with debt secured solely by a pledge of the net revenues from fees and charges of the activity. This debt and the full faith and credit of a related primary government or component unit (even if they are not expected to make any payments) is not payable solely from fees and charges of the activity. (Some debt may be secured, in part, by a portion of its own proceeds but should be considered as payable “solely” from the revenues of the activity.)
  • Laws or regulations require the activity’s costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues.
  • The pricing policies of the activity establish the fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service).

These criteria do not require insignificant activities of agencies to be reported as enterprise funds. For example, state law may require a county’s small claims court to assess plaintiffs a fee to cover the cost of frivolous claims. But taxes (not fees) are the principal revenue source of the county’s court system and the fees in question cover only the cost of frivolous small claims court cases. In this case, the county is not required to remove its court system or the small claims court activity from its general fund and report it in an enterprise fund.

Conversely, a state department of environmental protection regulation may require a water utility to recover the costs of operating its water plant (including debt service costs) through charges to its customers — the utility’s principal revenue source. Because these charges are the activity’s principal revenue source and the water utility is required to recover its costs, the utility is reported as an enterprise fund.

Examples of activities that may be accounted for as enterprise funds:

  • State unemployment compensation funds
  • Turnpike authorities
  • Lotteries
  • Universities

Once it is determined that an activity should be accounted for in an enterprise fund, the agency must establish a separate fund for each distinct service provided by the agency.

Report all university activity as business-type activity under a single-column enterprise fund. GASB 35 superseded GASB 15 that allowed public institutions to prepare their financial statements under the model contained in the 1973 AICPA Industry Audit Guide, Audits of Colleges and Universities (AICPA College Guide model). This reporting model used NACUBO classifications and subfunds that are not used in GASB statements.

Internal Service Fund (Fund Type 06) [+]

Create an internal service fund to provide goods or services on a cost-reimbursement basis to other funds, departments or agencies of the primary government and its component units or to other governments. In some instances, a single fund provides services to both external users and the primary government. If the primary government is not the predominant participant in the activity, report the fund as an enterprise fund.

The purpose of centralizing certain activities in an internal service fund is to achieve a level of operating efficiency that may not be available if the same activities were performed by multiple agencies within the primary government. For example, an agency sometimes centralizes the purchasing function to improve operating efficiency as well as to maintain fiscal control over the activity. Costs associated with the centralized activity are usually recovered from other agencies that benefit from the goods or services provided through the internal service fund.

It may not be necessary to establish an internal service fund if the activity involved is immaterial. But when various services are provided to numerous agencies, it is usually necessary to establish separate internal service funds in order to determine individual service costs and to restrict use of authorized resources.

Note: Based on a review of existing internal service funds, it was determined that the state of Texas has only one internal service fund — the employee’s life, accident, and health benefits fund. This fund is used to account for the services provided by the group insurance program to other agencies. The state of Texas is the predominant participant in the activity.

Glenn Hegar
Texas Comptroller of Public Accounts
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