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Business-Type Activities
Chapter 9
Learning Objectives
Why governments and NFPs engage in businesstype activities
Distinguish between Proprietary and
Governmental activities
Fundamental principles of Proprietary Fund
Accounting
Enterprise Funds
Internal Service Funds
Accounting for Insurance Activities
GASB 34, special problems of reporting
proprietary funds in government-wide statements
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Proprietary Funds
Reasons for use
-To compare benefits and costs of the
business-type activities of a government.
-Enhances management of activities
in which goods or services are
provided on a cost-reimbursement basis
to departments of the same government
or to the general public on a user charge basis.
Proprietary Funds
Two types of funds are classified as proprietary:
Internal service funds:
-Provide services to other government departments on a
user charge basis.
-Example: City of Houston Health Benefit and Longterm Disability funds.
Enterprise funds:
-Provide services to the general public on a user charge
basis.
-Example: City of Houstons Airports (Bush, Hobby and
Ellington Field), George R. Brown Convention Center,
etc.
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Proprietary Funds
Accounting Characteristics
Governments:
-Full accrual basis
-Recognize revenues as earned and expenses as incurred.
-Balance sheet recognition to both capital assts and long-term debt.
Not-for-profits:
-Full accrual basis
-Capital assets and long-term liabilities accounted for within the
funds.
-Resources are donor-restricted and classified per FASB Statement
No. 117
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Proprietary Funds
Required Financial Statements
Similar to those for a for-profit entity:
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Proprietary Funds
Accounting Equation
Assets = Liabilities + Net Assets
Unrestricted
Restricted
(e.g., for payment of
debt service)
Invested in Capital
Assets, Net of
Related Debt
Enterprise Funds
Enterprise funds are used to report the same functions
presented as business-type activities in the
government-wide financial statements.
Reasons for use
Used to
-Account for services provided to the general public on a user charge basis
or where the governing body has determined 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
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Enterprise Funds
Utility Plant - Construction in Progress
Q: Should interest incurred on debt during construction
be capitalized?
A: Yes.
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Enterprise Funds
Special Current Liabilities
In addition to the usual Accounts Payable and
Accrued Expenses, use two special current liability
accounts:
Customers Advances for Construction
Usually up-front deposits required to be made by
builders to provide all or part of the cost of
connecting new structures to utility lines. May or
may not be refunded in part upon completion
Customer Deposits
Usually reported under the caption Liabilities
Payable from Restricted Assets
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Enterprise Funds
Regulatory Accounting Principles (RAP)
Key RAP definitions
Original cost: The (depreciated) cost to the
first owner to place the utility plant into
public use
Utility Plant Acquisition Adjustment: The
difference between the purchase price of a
utility plant less the net original cost of the
plant on the sellers books.
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The City of Houston uses internal service funds to account for health and
benefits and long-term disability activities.
Because both of these services predominantly benefit governmental rather than
business-type functions, they have been included within governmental activities
in the government-wide financial statements.
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Accounting for both ISF & enterprise funds: must follow all FASB
pronouncements issued prior to Nov. 30th 1989 unless it conflicts with
GASB pronouncement.
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ISF Illustration
Q: ISF reported $2.7 million in depreciation, an
amount that the government takes into account in
establishing the rates charged to other funds. How
would this charge be reflected in the governmentwide statements?
A: The depreciation charges are incorporated into the
amounts billed to the funds to which the ISF
provide services. Therefore, in the governmentwide, they would be incorporated into the expenses
of the functions accounted for in those funds.
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ISF Example
Q: In which column on the government-wide
statement of net assetsthat for governmental
or business-type activitiesis it most likely that
the assets and liabilities of the ISF would be
included?
A: Unless the ISF provide services mainly to units
accounted for in proprietary funds, their assets
and liabilities would be reported in the column
for governmental-type activities.
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Self-Insurance
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