When should I use enterprise funds?

Are you reporting your activities in the correct fund type? Local governments should analyze the services they are providing and determine if the fund types used are appropriate.

An enterprise fund is a fund that may be used to report any activity for which a fee is charged to external users for goods or services. We have observed that local governments sometimes are not reporting enterprise activities in the correct fund type, and noted the following areas of concern:

• Activities financed almost exclusively by user fees (utilities) are reported in the general or special revenue funds, when an enterprise fund should be used
• Enterprise funds are incorrectly used for activities when the only revenue sources are taxes, grants and transfers (these activities should be reported in governmental funds)
• Separate enterprise funds reporting construction, capital improvements and debt servicing related to enterprise funds (must be in the same fund as operations)
• Separate enterprise funds reporting customer deposits or equipment reserves (must be in the same fund as operations)

Because the purpose of financial reporting is to provide information needed to make financial decisions and assess financial stewardship, it is vital to make sure that the reporting meets the established governmental reporting standards. We encourage you to analyze whether your government appropriately classifies and reports its activities, and to make appropriate revisions if necessary.

GASB has issued several pronouncements addressing various fund types, which is indicative of the importance of proper classification of activities. Specifically, GASB Statement 34 provides guidance on the use of proprietary funds, of which enterprise funds are one type. Paragraph 67 of that Statement states that if an activity meets any of the following three criteria, it must be reported in an enterprise fund. These criteria are:

• The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity
• Laws or regulations require that fees and charges be set to recover costs including capital costs (depreciation or debt service)
• There is a pricing policy that fees and charges be set to recover cost, including capital costs (depreciation and debt service)

These criteria should be applied in the context of the activity's principal revenue source.

The term activity generally refers to programs and services. This term is not synonymous with “fund.” As a practical consequence, if an activity reported as a separate fund meets any of the three criteria, it should be an enterprise fund. Also, if a “multiple activity” fund (e.g., general fund) includes a significant activity whose principal revenue source meets any of these three criteria, the activity should be reclassified as an enterprise fund.

The determination of an activity's principal revenue source is a matter of professional judgment. A good indicator of the activity's significance might be comparing pledged revenues or fees and charges to total revenue. For example, consider a county auditor's office that charges fees to provide a payroll service to various taxing districts. Even if the fee is meant to cover the cost of the service, the county auditor function as a whole is primarily supported with tax dollars from the general fund. It would be allowable in this case to leave the activity all within the general fund.

Finding an appropriate fund type requires a careful analysis because there is not always a clear choice. For example, building permit fees may be accounted for in the general fund or a special revenue fund in certain circumstances, such as when they are partially supported by taxes. However, if there is a pricing policy to recover the cost of issuing those individual building permits, they should be reported in an enterprise fund.

If you have any questions, please contact Alexandra Johnson at johnsoal@sao.wa.gov or our HelpDesk.