Although the content, presentation, and basis of accounting may vary according to the reporting requirements of Statement 34, the basic elements of the financial statements remain the same. The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements. However, the narrative does not exhaustively discuss all reporting requirements that school districts may face. School district personnel, therefore, should refer to the actual GASB statements or other definitive sources for detailed disclosure requirements and reporting formats.
Assets are defined as a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events. The following typically represent the major asset categories:
Cash and Investments
Cash and investments often represent a large portion of the assets on a government's balance sheet. Because of the importance of these assets, proper management based on sound investment policies and strategies is vital. The investment of excess funds is often governed by statute. Many state governments have adopted legal frameworks that restrict the investment activities of local governments, including school districts. These restrictions often place limitations on the types of investments allowed, regulate procedures used to manage investments, and require governing bodies to institute certain review procedures.
The following discussion about cash and investments does not illustrate all the possible investment scenarios that a local government might use. However, the following five general rules may protect a school district from problems related to investment decisions:
Certain words in common usage have more limited definitions when they are used for accounting and financial reporting. Within the context of governmental accounting, the following definitions describe the specific content of accounts used by governmental entities:
The pooling of cash and investments provides several advantages, including better physical custody and control, enhanced investment opportunities, and ease of operations. It may also simplify custody, collection, and disbursements. In certain instances, the pooling of cash and investments may be prohibited in contractual clauses, such as bond indentures, or through legal restrictions. If the school district pools cash for investment purposes, the resulting pooled cash and investments may qualify as a cash equivalent for participating funds, even though some of the pooled investments would not individually meet that definition.
Financial Statement Presentation and Disclosure. The complexity and range of investment potential and the large amounts of cash and other assets present in most governmental units emphasize the need to carefully capture and present these data in usable form. Cash and investment balances are segregated into individual funds and, depending on contractual requirements, may be classified as restricted assets. If a fund overdraws its share of a pooled cash account, the overdraft should be reported as a liability of that fund. Fund overdrafts of this type should be reported as interfund payables and receivables.
Disclosures for cash and investments normally include, in addition to the GASB Statements 3 and 40 disclosures (see following chapter), the valuation basis of investments (e.g., investments are stated at fair value that approximates market). Changes in fair value are included as a component of investment income.
The detailed disclosure requirements for cash and investments have been established in GASB Statement 3, Deposits With Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements (issued in April 1986); GASB Statement 28, Accounting and Financial Reporting for Securities Lending Transactions (issued in May 1995); GASB Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (issued in March 1997); and GASB Statement 40, Deposit and Investment Risk Disclosure—an Amendment of GASB Statement No. 3 (issued in March 2003). These GASB statements and the entity's external auditor should be consulted regarding disclosure requirements for cash and investments.
Receivables are generally recognized when a service is performed and/or goods are delivered. Receivables usually arise as a result of revenue transactions. The following are the main sources of revenues for school districts that would result in outstanding receivables:
The accounting for revenues in governmental entities depends on the type of fund in which the revenue is recorded.
Because governmental funds use the modified accrual basis of accounting, governmental fund revenues should be recognized in the accounting period in which they become susceptible to accrual, that is, when they become both measurable and available to finance expenditures of the fiscal period. "Available" refers to the collectibility of the receivable within the current period or soon enough thereafter to be used to pay for liabilities of the current period. A general criterion for availability is 60 days, although a longer or shorter period may be used, except for property taxes (where the maximum period may not be more than 60 days). The availability period will be disclosed in the notes. Each entity should adopt a revenue accrual policy that implements the susceptibility-to-accrual criterion and applies it consistently. This policy should also be disclosed in the notes to the financial statements.
Proprietary funds use the accrual basis of accounting to determine when revenues and related receivables should be recorded. Revenues are recognized when they are earned, that is, when the earnings process is complete and an exchange has taken place.
GASB Statements 33, Accounting and Financial Reporting for Nonexchange Transactions, and 36, Recipient Reporting for Certain Shared Nonexchange Revenues, may have an impact on a governmental entity's reporting of revenues related to certain nonexchange transactions. Entities should consult the statements and their external auditors to determine the impact.
Property Taxes Receivable. Property taxes are generally assessed to finance expenditures of a specific fiscal year. On the assessment date or levy date, the property taxes become a lien against the assessed property. Property taxes should be recorded in the governmental funds by using the modified accrual basis of accounting (recorded when they are both measurable and available). The amount of the property taxes receivable is based on the assessed value of the property, the current property tax rate, and an estimate of the uncollectible portion. When taxes are levied, the revenue and related receivable should be recognized, net of estimated uncollectible amounts. A receivable is usually recognized at the time an enforceable legal claim arises. The revenue is usually recognized in the first period in which the use of the revenues is permitted or required.
If taxes that are levied to finance a subsequent fiscal period are collected in the current period, the amount collected should be recorded as deferred revenue. In the next fiscal year, a journal entry will be recorded to recognize the revenue amount that was collected in advance.
When property taxes are delinquent but expected to be collected, they should be reported in the fund financial statements as deferred revenues if it is estimated that the taxes will not be available to pay current obligations of the governmental fund. This situation indicates that the delinquent property taxes are not expected to be collected within 60 days of the close of the fiscal year, although a shorter availability period may be used. This "60-day rule" is established by GAAP and cannot be exceeded, even if the district's collection period is shortly thereafter.
Due From State. This receivable represents amounts from state resources that exceed the amounts received during the fiscal year for which the school district has met all eligibility requirements. A district should also use the measurable and available criteria that are consistent with the modified accrual basis of accounting in the governmental funds to record revenues due from the state. Revenue due from the state for which all eligibility requirements were met during the fiscal year, and which is expected to be received within the availability period (e.g., 60 days) from the financial statement date, should be recorded as a receivable using this account.
Due From Federal Agencies. This account represents amounts—for which all eligibility requirements have been met by a district under a federal financial assistance program—that are expected to be available to finance current liabilities. Such revenues are usually accounted for in the general fund or special revenue funds using the measurable and available criteria, as appropriate for a modified accrual-based fund. If this is an expenditure-driven grant, revenues may be recognized only to the extent that expenditures have been incurred.
Due From Other Governments or Agencies. In some instances, districts become eligible for revenue from other local governments or agencies through grant programs or by providing services. The receivable earned from such revenue should be recorded only if it also meets the measurable and available criteria. Thus, when the revenue has been earned under the grant program, or when the services have been provided, the district should recognize the revenues and receivables for the amount earned. In addition, if the amount of an outstanding receivable at the end of a fiscal year is not expected to be collected within the availability period (e.g., 60 days) from the financial statement date, the district should record a deferred revenue for the outstanding amount.
Accrued Interest Receivable. Accrued interest represents the amount of interest at the end of an accounting period on all cash accounts and investments held at that date. Accrued interest should be computed for all investments and cash accounts held by the government that generate interest earnings regardless of the expected payment date.
Governmental accounting generally requires that amounts spent to purchase goods be recorded as an expenditure at the time of the purchase. An exception to this general rule is made for inventory. If the amount of inventory on hand at year-end is significant, the value of such inventory should be recorded as an asset. This is considered the "purchase method," whereupon fund balance is reserved for the amount of inventory. Inventory may also be recorded as an expenditure when it is consumed rather than when it is purchased. Under the "consumption method," purchase transactions are first recorded in the inventory account. As inventory is actually used, an entry to recognize the expenditure is posted to the appropriate accounts. This method is required for the proprietary funds.
It is not uncommon for school districts to have a relatively high level of inventory at the end of the fiscal year, because this often coincides with the start of a new school year. In addition to the balance sheet presentation, note disclosure regarding the method of accounting for inventory should be made. Districts often distribute inventoried supplies to schools prior to fiscal year-end to accommodate the beginning of the new academic school year. Such inventories may either be included in inventory at year-end or be expensed in the year of distribution.
For the entity-wide statements, the consumption method must be used. If the purchase method is used in the governmental funds and the consumption method produces a different result, the difference should be included in the reconciliations of governmental funds to governmental activities (Guide to Implementation of GASB Statement 34 and Related Pronouncements: Questions and Answers [GASB 2001], Q23; or Comprehensive Implementation Guide—2005: Questions and Answers [GASB 2005b], Q7.35).
Inventories in school districts generally represent goods that are insignificant individually, but are significant as a whole. These items may be described as follows:
The accounting for inventory can be broken down into the following two general areas:
For internal control purposes, these two functions should be performed by individuals (or departments, if the district is of sufficient size) that are organizationally independent. The results of the two processes should then be reconciled by personnel external to these functions. This segregation of duties will improve the internal controls over inventory and may mitigate the risks of theft or defalcation.
Accounting for and Control of Inventory. Governmental entities have several options for physical counts of inventory. Independent auditors are required by generally accepted auditing procedures to conduct physical observations of inventories at least annually when such inventories are material to the district's operations. The physical observations should be conducted as of the balance sheet date or as of a single date that is within a reasonable time before or after the balance sheet date. The independent auditor is usually present at the time of the inventory to assess the effectiveness of the inventory-taking procedures and to determine the reliance that the independent auditor can place on the entity's representations relating to the physical condition and quantities of the inventory. The most common physical inventory count methods are
Accounting for Commodities. School districts that receive federal commodities during the year should recognize the fair value as revenue in the period when all eligibility requirements are met—typically, when the commodities are received (Guide to Implementation of GASB Statement 34 and Related Pronouncements: Questions and Answers [GASB 2001], Q152; or Comprehensive Implementation Guide—2005: Questions and Answers [GASB 2005b], Q 2.39). Because the federal agricultural commodity program involves purpose restrictions on the use of the resources, the value of inventory remaining on hand at fiscal year-end should be reflected as a reservation of fund balance/restriction of net assets (Statement 33, paragraph 14).
However, there may be instances in which resources are transmitted before the eligibility requirements are met. These resources would be reflected by the recipient as deferred revenues (Statement 33, paragraph 21).
The advanced funding of pension plans or other postemployment benefit plans is an intangible asset, which is recognized by an employer for contributions to a pension plan or other postemployment benefit plans, which were greater than pension or other postemployment benefit expense. This asset will be amortized against the pension or other postemployment benefit costs of the employer when due. (Other postemployment benefits include, but are not limited to, health care benefits, life insurance disability, long-term care, or other benefits).
Governmental entities are responsible for accounting for, controlling, and reporting both current and capital assets. Capital assets have certain properties that distinguish them from other types of assets. Capital assets are
Capital assets may include the following:
The emphasis in governmental accounting for capital assets is on control and accountability. Accordingly, a variety of data must be maintained to ensure control and accountability over an entity's capital assets such as the following:
Capital asset records are necessary to demonstrate accountability for the custody and maintenance of individual items and to assist in projecting future requirements. All capital transactions for the acquisition of capital assets should be controlled through a well-defined authorization procedure. If the budget does not authorize the purchase of specific items, approval power, subject to specific monetary limits, should be assigned to the chief administrator or to a person designated by the chief administrator. The entity should adopt policies to govern this situation even if it has not been an issue in the past.
Basis of Capital Assets. Capital assets are included in the financial records at cost. In some situations, the purchase or acquisition documents may not be available for capital assets already on hand. If reliable historical records are not available, an estimate or appraisal of the original cost based on other information, such as price index levels at time of acquisition, may be used. The intent of such valuation is to record a fair value at the date of acquisition and not expend excessive resources in ascertaining exact costs. If capital assets are acquired by gift, then the fair value on the date received is the appropriate amount to include in the capital asset records.
Capital assets may be acquired by several methods such as the following:
All capital assets acquired in some manner other than as a gift are recorded at the cost necessary to place the asset in service. Capital assets arising from gifts or donations are recorded at their estimated fair value at the time of receipt.
Capital Asset Reporting. GASB Statement 34 established reporting requirements for general government capital assets, as follows:
In addition to the GAAP reporting requirements referred to above, GASB recently issued Statement 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. Governmental entities, including school districts, are required to report the financial effects of capital impairments when the service utility of a capital asset has permanently declined significantly and unexpectedly. Though such events are generally rare, standardized guidance now exists to assist districts in accounting for and reporting significant capital asset impairments. In brief, Statement 42 establishes the following:
Note disclosures associated with capital asset impairments are summarized later in this chapter.
Capitalization Thresholds, Estimated Useful Lives, and Depreciation Methods for Capital Assets. Given the requirements in GASB Statement 34 to depreciate general capital assets, governments must establish a range of policies regarding capitalization thresholds for capital assets, estimates for useful lives, and depreciation methods. Statement 34 does not prescribe policies for any of these areas; however, note disclosure is required. Management is granted discretion to determine appropriate policies for control purposes in accordance with the laws and regulations under which the entity operates. Some states have established specific regulations surrounding capital assets; therefore, school districts should consult state sources in establishing new policies.
Capitalization Thresholds. Capitalization threshold refers to the dollar value threshold at which purchases of assets will be capitalized in the financial records of the governmental entity (i.e., within the proprietary funds, fiduciary funds, and government-wide financial statements) rather than be recorded as an expenditure at the time of purchase (except for the governmental funds where it remains as an expenditure). Many assets having useful lives greater than 1 year do not have values that are material to the entity's financial statements. Additionally, the costs of tagging, tracking, and accounting for numbers of immaterial items may be considered excessive by the entity. As a result, many local governments establish capitalization thresholds that exclude reporting these items as capital assets and instead rely on systems other than the financial management system for tracking and control purposes (e.g., computer inventories, building equipment lists, maintenance systems).
In determining an appropriate capitalization threshold, entities should consider the following factors:
Several resources exist to guide governmental entities in making informed decisions related to asset capitalization thresholds, including industry guidelines for specific assets, state auditors' and comptrollers' guidelines for state agencies, and the implementation guide produced by the Association of School Business Officials (ASBO) International. These resources are typically available via state websites.
Finally, local governmental entities should review applicable state and federal requirements related to asset capitalization in determining appropriate policies. For example, the federal government uses a dollar threshold of $5,000 for federal grant management purposes. This threshold may have an impact on an entity's policies, particularly as it relates to capital assets that are acquired with federal grant funds. A threshold should only apply if the item has a useful life of 1 year or more. It is highly recommended, however, that a threshold for capitalization (or for coding purposes outlined in the object codes within Chapter 6: Account Classification Descriptions or within appendix E) should not be less that $500.
Estimated Useful Lives. The estimated useful life of an asset is the period (of months or years) that the asset will be used for the purpose for which it was purchased. In determining the estimated useful life of an asset, consideration must be given to the asset's present condition and intended use, maintenance policy, and how long the asset is expected to meet service and technology standards. School districts may use general guidelines obtained from professional or industry organizations, information on comparable assets of other school districts/governments, and internal historical data. The determination of appropriate estimated useful lives is a management decision that is affected by a number of the following factors:
Many sources of information on estimated useful lives are available to assist in establishing appropriate policies in this area. These sources include, but are not limited to, the following:
A periodic reassessment of the estimated useful lives of capital assets may be appropriate. Any change in the useful life of a capital asset should be applied prospectively in accordance with Accounting Principles Board Opinion 20.
Web searches can render informative policies and recommendations of many governmental entities regarding the valuation of assets, the assignment of useful lives, and other similar information. Specific accounting or GAAP reporting manuals for each state can be searched, for example. Weblinks for this information tend to change over time as websites are updated or removed.
Depreciation Methods. GASB Codification Section 1400.113 states that "depreciation expense should be measured by allocating the net cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational manner" (GASB 2005a). Although GASB requires governmental entities to depreciate capital assets (other than nonexhaustible assets), the statement does not prescribe a method. As a result, depreciation methods are a management decision that should be based on the resources necessary to determine the various calculations and the capabilities of asset management systems. In addition to composite or group methods, any established depreciation method may be used (e.g., straight-line, sum-of-the-years' digits, or double-declining balance).
It should be noted, however, that the most common depreciation method used by governmental entities, including school districts, is the straight-line method. There are several reasons for this. First, it is a simple yet rational method that allocates depreciation based on the capital assets' useful life. Also, it is the primary method that incorporates the potential of salvage value in the calculation. Some would argue that the GASB Codification implies a preference for the straight line method within Section 1400.113 simply because it refers to the potential inclusion of a salvage value in the depreciation calculation. Thus, while not specifically required for governmental entities, it is the most commonly used. An example calculation would be as in exhibit 3.
Thus, Accumulated Depreciation, a contra-asset account, would increase by $5,000 each year. Accordingly, the annual depreciation expense would be $5,000. The Accumulated Depreciation associated with the capital asset at the end of year 6 would be $30,000 ($5,000 multiplied by 6 years). The Net Book value of the capital asset at the end of year 6 would be as in exhibit 4.
Depreciation may be calculated for individual assets or it may be determined for a
The depreciation method can vary for different categories of assets.
To simplify the calculations involved, the composite method may be used to calculate depreciation expense. It is applied to a group of similar assets or dissimilar assets in the same class using the same depreciation rate, but not across classes of assets. The estimated life for the group may be based on the individual weighted average, the simple average of the useful lives of the assets in the group, or the weighted average or assessment of the life of the group as a whole. This method assumes no salvage value for assets; therefore, it simplifies the calculations and the recording of asset dispositions.
Works of Art and Historical Treasures. Works of art, historical treasures, and similar assets are a special class of capital assets that may require developing a specific capitalization and depreciation policy. These assets are defined as items held singly or in collections that meet all of the following conditions (GASB Statement 34, Paragraph 27):
Historical buildings, monuments, and fountains are capital assets that may qualify as works of art, historical treasures, or similar assets if they meet the requirements above. School districts that have collections meeting the criteria above may choose not to capitalize these collections of works of art or historical treasures.
Depreciation is not required for those capitalized collections or individual items that are considered to be inexhaustible. Inexhaustible collections of individual works of art or historical treasures are those with extraordinarily long useful lives. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value.
Technology-Related Assets. Technology-related assets are a class of capital assets that may require special treatment and reporting by school districts based on local or state reporting and accountability requirements or policies. Although technology-related assets are not dissimilar from other capital assets (such as vehicles or furniture and fixtures), the resources dedicated to the installation and ongoing support and use of technology by school districts have resulted in an increased level of interest by policymakers and citizens related to the use of resources dedicated to these purposes. Thus, many school districts have instituted special accounting and reporting practices associated with expenditures for technology-related assets.
To facilitate the proper accounting and reporting of technology expenditures by school districts, chapter 6, "Account Classification Descriptions," in this handbook establishes a number of expenditure and asset reporting codes. As is outlined in chapter 6, school districts should account for technology-related expenditures according to the following principles:
Using these codes to account for and report on technology-related costs will allow school districts to
Although chapter 6 addresses many of the key issues related to tracking and reporting on technology-related costs, school districts will still need to establish capitalization and depreciation policies for technology assets. School districts should capitalize only those technology assets that meet their local policies in this area. Noncapital technology purchases should be treated as supplies for reporting purposes (use expenditure object code 650).
E-Rate is not currently addressed within the new accounting codes for technology, as is noted in chapter 6 in this handbook. The E-Rate is a discount, ranging from 20 to 90 percent, available to schools and libraries for telecommunications services, Internet access, and internal wiring to connect classrooms to the Internet (http://www.sl.universalservice.org). The program may also involve reimbursements from telecommunications vendors or the Federal Communications Commission (FCC) for costs incurred related to these services or access. School districts must apply to participate in the FCC program. In 1997, the FCC adopted a Universal Service Order to implement the Telecommunications Act of 1996. The level of discount is determined by the percentage of students eligible for free or reduced-price lunch under federal guidelines. Libraries use free or reduced-price lunch status and an urban/rural classification to determine their discount. Schools must develop a technology plan that is approved by an independent agency, such as a state department of education or a library agency. A school district or library must submit to the Schools and Library Division (SLD) a self-certification of eligibility. Schools and libraries pay only the nondiscounted portion of their costs. The vendor of the services and the school district enter into a contract. The school district is billed at the discounted rate or may be reimbursed by the vendor or the FCC if it pays the full rate. The vendor receives a payment from the school district that is based on the discounted rate and from the Universal Service Fund administrator. The method of recognition of E-Rate as a financial resource in the accounting records may differ depending on whether it is a reimbursement or a discount. As a result, inconsistencies exist in current practice regarding the accounting treatment afforded E-Rate. NCES suggests as a matter of practice that E-Rate should be netted against the expenditure if it was received in the same fiscal year; if it was received in a subsequent fiscal year, it should be coded as a Refund of a Prior Year's Expenditure (source code 1980). Because GASB has not specifically addressed this issue, definitive guidance is not available at this time.
Infrastructure assets are long-lived capital assets that are normally stationary and can be maintained for significantly longer period of time than most other capital assets.
Infrastructure assets include the following:
Parking lots and related lighting systems may be defined by the entity as part of the associated building, rather than as infrastructure. Most school districts have either no infrastructure assets or an immaterial amount.
Reporting Requirements. Infrastructure assets have several reporting requirements as follows:
In determining when to implement the retroactive infrastructure asset reporting requirements, governmental entities should consider the value of any related debt that will be reflected in the Statement of Net Assets.
Valuation of Infrastructure Assets. Infrastructure assets are reported at historical cost or estimated historical cost. If a determination of the historical cost is not viable because of incomplete records, an estimated historical cost may be determined in the following ways:
Depreciation of Infrastructure Assets. GASB Statement 34 allows two distinct approaches to reporting infrastructure assets in the Statement of Net Assets. The standard approach requires governmental entities to capitalize all major infrastructure assets and depreciate them over their useful lives. This approach does not differ from the accounting and reporting treatment of other types of capital assets. Alternatively, entities may elect to use a modified approach to infrastructure asset reporting under a specific set of conditions. The modified approach allows governmental entities to capitalize assets yet avoid the depreciation of their eligible infrastructure assets if they meet the following two criteria:
The modified approach is not limited to general infrastructure assets, that is, infrastructure assets associated with governmental activities. Eligible infrastructure assets of enterprise funds that were previously depreciated may also be reported using the modified approach.
If entities choose the modified approach for reporting general infrastructure assets, they are required to present information on condition and on estimated versus actual maintenance as Required Supplementary Information (RSI).
If the governmental entities report eligible infrastructure assets using the modified approach, additional schedules and disclosures are required as RSI.
Entities should consult their external auditors and the detailed disclosure requirements outlined in GASB Statement 34 to determine policy decisions concerning the modified approach of infrastructure asset reporting.