3 Accounting
3.1 Accounting Principles and Internal Control
3.1.10 Accounting Principles
3.1.10.10 The following principles of accounting and financial reporting are based on those set forth in the Governmental Accounting Standards Board’s (GASB) Codification of Governmental Accounting and Financial Reporting Standards (Cod.). The BARS manual permits accounting and financial reporting that conforms to these principles in all respects and requires GAAP municipalities to account and report in conformity with these principles, except that the annual report required is not as extensive as the Annual Comprehensive Financial Report (ACFR).
3.1.10.30 Measurement focus and basis of accounting in the basic financial statements - Government-wide financial statements
The government-wide statement of net position and statement of activities should be prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange-like transactions should be recognized when the exchange takes place. Revenues, expenses, assets, and liabilities resulting from nonexchange transactions should be recognized in accordance with the Governmental Accounting Standard Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards (Cod.) Section (Sec.) N50 – “Nonexchange Transactions”.
3.1.10.40 Measurement focus and basis of accounting in the basic financial statements - Fund financial statements
In fund financial statements, the modified accrual or accrual basis of accounting, as appropriate, should be used in measuring financial position and operating results.
a. Financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues should be recognized in the accounting period in which they become available and measurable. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term liabilities, which should be recognized when due.
b. Proprietary fund statements of net position and revenues, expenses, and changes in fund net position should be presented using the economic resources measurement focus and the accrual basis of accounting.
c. Financial statements of fiduciary funds should be reported using the economic resources measurement focus and the accrual basis of accounting, except for the recognition of certain liabilities of defined benefit pension plans and certain postemployment healthcare plans. Additionally, governments should review assets received or disbursements made soon after the end of a fiscal year to evaluate the need for accruals in the fiduciary funds.
d. Transfers should be reported in the accounting period in which the interfund receivable and payable arise.
Note: The various fund types may be grouped in the following manner to more clearly portray their relationship to an accounting basis:
Flow of Current Financial Resources Measurement Focus Funds – use the modified accrual basis:
000-099: General (Current Expense) Fund
100-199: Special Revenue Funds
200-299: Debt Service Funds
300-399: Capital Projects Funds
700-799: Permanent Funds
Flow of Economic Resources Measurement Focus Funds – use full-accrual basis:
400-499: Enterprise Funds
500-599: Internal Service Funds
600-609: Investment Trust Funds
610-619: Pension (and Other Employee Benefit) Trust Funds
620-629: Private-Purpose Trust Funds
630-698: Custodial Funds
699: External Investment Pool Fund
3.1.10.50 Reporting capital assets
A clear distinction should be made between general capital assets and capital assets of proprietary and fiduciary funds. Capital assets of proprietary funds should be reported in both the government-wide and fund financial statements. Capital assets of fiduciary funds should be reported only in the statement of fiduciary net position. All other capital assets of the government are general capital assets. They should not be reported as assets in governmental funds but should be reported in the governmental activities column in the government-wide statement of net position. The Capital Assets (BARS 3.3.9, 3.3.10 and 3.3.11) sections of the BARS manual provide additional information regarding accounting and reporting of capital assets.
3.1.10.60 Reporting long-term liabilities
A clear distinction should be made between fund long-term liabilities and general long-term liabilities. Long-term liabilities directly related to and expected to be paid from proprietary funds should be reported in the proprietary fund statement of net position and in the government-wide statement of net position. Long-term liabilities directly related to and expected to be paid from fiduciary funds should be reported in the statement of fiduciary net position. All other unmatured general long-term liabilities of the governmental unit should not be reported in governmental funds but should be reported in the governmental activities column in the government-wide statement of net position.
3.1.10.70 Revenue, expenditures, expense and transfer account classifications
a. At a minimum, the statement of activities should present:
(1) Activities accounted for in governmental funds by function to coincide with the level of detail required in the governmental fund statement of revenues, expenditures, and changes in fund balances
(2) Activities accounted for in enterprise funds by different identifiable activities.
(3) Contributions to term and permanent endowments, contributions to permanent fund principal, other capital contributions, special and extraordinary items, and transfers between governmental and business-type activities should each be reported separately from, but in the same manner as, general revenues.
b. In governmental fund statement of revenues, expenditures, and changes in fund balances:
(1) Revenues should be classified by fund and source. Expenditures should be classified by fund, function (or program), organization unit, activity, character, and principal classes of objects.
(2) Proceeds of general long-term debt issues should be classified separately from revenues and expenditures.
(3) Transfers should be classified separately from revenues and expenditures
(4) Special and extraordinary items should be reported separately after “other financing sources and uses”.
c. In proprietary fund statement of revenues, expenses, and change in fund net position should present:
(1) Revenues should be reported by major sources and expenses should be classified in essentially the same manner as those of similar business organizations, functions, or activities. Revenues and expenses should be distinguished as operating and nonoperating.
(2) Contributions to term and permanent endowments, other capital contributions, and special and extraordinary items should be reported separately after nonoperating revenues and expenses.
(3) Transfers should be reported after nonoperating revenues and expenses.
3.1.10.80 Annual financial reports
The items listed below and in the GAAP Reporting Requirements (BARS 4.1.1) section follow national standards of financial reporting. They should not be confused with legal reporting requirements, which are prescribed by the State Auditor’s Office for all local governments in Washington State. The legal requirements are consistent with these national standards, but they are not identical. Specific legal reporting requirements can be found in the BARS Reporting Requirements (4.1.2) section.
The financial statements should include the financial reporting entity which consists of (1) the primary government, (2) organizations for which the primary government is financially accountable, and (3) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s basic financial statements to be misleading or incomplete. For more information see BARS 4.1.1.
a. General purpose external financial reports should be prepared and published. Governments engaged in governmental and business-type activities should include, at a minimum:
(1) Management’s discussion and analysis (MD&A).
(2) Basic financial statements. The basic financial statements should include:
(a) Government-wide financial statements.
(b) Fund financial statements.
(c) Notes to the financial statements.
(3) Required supplementary information (RSI) other than MD&A.
b. Governments engaged only in business-type activities should present only the financial statements required for proprietary funds. They should include:
(1) Management’s discussion and analysis (MD&A)
(2) Proprietary fund financial statements
(3) Notes to the financial statements
(4) Required supplementary information (RSI) other than MD&A, if applicable.
An Annual Comprehensive Financial Report (ACFR) may be prepared and published covering all activities of the financial reporting entity. The ACFR includes not only the financial reports listed above but also an introductory section, combining and individual fund statements, schedules, narrative explanations, and a statistical section. Preparation of an ACFR is not required.
3.1.10.90 Accounting changes and error corrections - Definitions
The Government Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards (Cod.) Section (Sec.) 2250—Additional Financial Reporting Considerations establishes standards of accounting and reporting regarding accounting changes and error corrections.
There are four categories of accounting changes and error corrections defined as follows:
Change in accounting principle:
A change in accounting principle is the application of an accounting principle to transactions, or events, of similar type that is different than the accounting principle previously applied.
A change occurs when:
a. A change in the application of one generally accepted accounting principle to another that is justified on the basis that the new one is preferable
b. The implementation of new pronouncements
Change in accounting estimate:
An accounting estimate is an amount subject to measurement uncertainty that is calculated based on inputs and disclosed in the basic financial statements. Inputs can be data, assumptions, or measurement methodologies.
A change in accounting estimate occurs when the inputs (which could be a change to data, assumptions, or measurement methodologies) used to calculate the accounting estimate have changed. Changes may result from a change in circumstances, new information or more experience.
Change to or within the financial reporting entity:
A change to or within the financial reporting entity occurs when the any of the following occur:
a. The addition or removal of a fund that results from the movement of continuing operations within the primary government, including its blended component units
b. A change in a fund’s presentation from major or nonmajor
c. The addition/removal of a component unit to the financial reporting entity
d. There is a change in a component unit’s presentation as blended or discretely presented
Error correction:
An error occurs when any of the following are identified as of the previous financial statement date:
a. Mathematical mistake
b. Mistake in the application of accounting principles
c. Oversight or misuse of facts that existed at the time the financial statements were issued about conditions that existed as of the financial statement date is identified.
3.1.10.100 Accounting changes and error corrections - Accounting and reporting
Accounting and reporting for each accounting change and error correction category is discussed below. If a government has separately displayed in the financial statements the effects of each accounting change or error correction by reporting unit, those effects need not be repeated in the notes to the financial statements. Additionally, note disclosure requirements for each accounting change and error correction can be found at Note X - Accounting Changes and Error Corrections.
Change in accounting principle:
In the absence of other specific guidance, governments that experience a change in accounting principle should report the change retroactively by restating the beginning net position, fund balance, or fund net position by the cumulative effect of the change on prior periods.
Change in accounting estimate:
Governments that experience a change to an accounting estimate calculation should recognize the change prospectively in the reporting period that the change occurs, unless other specific requirements address how a change would be reported.
Change to or within the financial reporting entity:
Governments that experience a change to or within the financial reporting entity should recognize the change by adjusting the current period beginning net position, fund balance or fund net position. The recognition of this will appear as if the change occurred at the beginning of the reporting period.
Error correction:
In the case that a government is required to correct an error, the correction should be reported retroactively by restating the financial statements for all periods presented. The restatement amount should total the cumulative effect of the error on the net position, fund balance or fund net position impacted by the error.
For guidance on how to apply accounting changes and error corrections to comparative financial statements, see GASB Cod. Sec. 2250.
3.1.10.110 Accounting changes and error corrections - Required Supplementary Information (RSI) and Supplementary Information (SI)
Change in accounting principle and to or within the financial reporting entity
For reporting periods that are presented in the basic financial statements, the same periods presented in required supplementary information (RSI) (including management’s discussion and analysis [MD&A]) or supplementary information (SI) should be consistent with the manner in which the information for those periods is presented in the basic financial statements. (That is, the reporting periods should be adjusted or restated in the same manner as the basic financial statements.)
For prior reporting periods that are earlier than those presented in the basic financial statements, information for those prior periods that is presented in RSI (including MD&A) or SI should not be restated for a change in accounting principles or a change to or within the financial reporting entity.
If prior-period information presented in RSI (including MD&A) or SI is not consistent with current-period information as a result of a change in accounting principle or a change to or within the financial reporting entity, an explanation of why the information is not consistent should be provided in RSI (including MD&A) or SI, as applicable. In MD&A, that explanation should include a reference to the related note disclosure in the basic financial statements.
Error correction
For reporting periods that are presented in the basic financial statements, the same periods presented in RSI (including MD&A) or SI should be restated. If the error affects periods earlier than those presented in the basic financial statements, all affected information should be corrected by restating the information for those prior periods in RSI (including MD&A) or SI, if practicable.
Information presented in RSI (including MD&A) or SI that is affected by an error should be identified as restated or not restated, as appropriate, and an explanation about the nature of the error should be provided in RSI (including MD&A) or SI, as applicable.
In addition, if it is not practicable to restate information in RSI or SI in the reporting year of the error correction, an explanation of why it is not practicable to restate should be provided in RSI (including MD&A) or SI, as applicable. It is expected that the restatement of the RSI and SI will be performed in the next reporting period’s financial statements.