In this video, we walk through 5 BAR practice questions teaching about preparing the statement of net position. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Preparing the Statement of Net Position
The government-wide statement of net position is one of the core financial statements for state and local governments. Unlike the fund-level statements, which emphasize short-term financial flows, the government-wide statement provides a broad, long-term perspective by reporting assets, liabilities, and net position using the accrual basis of accounting.
Understanding how to prepare this statement from trial balances and supporting documentation requires knowing how capital assets are measured, how debt is handled, and how activities are classified. Below is an overview of the key concepts illustrated through examples.
Government-Wide Statements Use Accrual Accounting
In government-wide financial reporting, transactions are recorded when they occur, not when cash changes hands. This means governments must accrue expenses like bond interest.
For example, if a county issues $10 million in bonds with 5% interest payable semiannually, and the reporting date falls between interest payment dates, the government must record the portion of interest that has accrued but not yet been paid as interest payable, with a matching interest expense. This ensures that liabilities and expenses are presented consistently with GAAP.
Net Position Includes Capital Assets Net of Depreciation
The statement of net position reports capital assets at their proper valuation. Purchased assets are recorded at historical cost, while donated assets are recorded at fair value on the date of donation. Over time, depreciation is deducted to reflect usage of the assets.
For example, if a city purchases land for $4 million and receives donated land valued at $2.5 million, the government will report $6.5 million in land on the statement of net position. This distinction between cost and fair value ensures accurate reporting of resources available for service delivery.
Governmental vs. Business-Type Activities Are Reported Separately
Government-wide reporting distinguishes between governmental activities and business-type activities. Governmental activities are typically funded by taxes and general revenues (like public safety, libraries, or street maintenance). Business-type activities, by contrast, are supported primarily through user fees (like utilities, airports, or golf courses).
For example, police protection and park maintenance are governmental activities, while operating a city-owned electric utility is a business-type activity. This distinction helps readers understand which services are self-supporting and which rely on tax support.
Interest Expense Accrues Over Time
Bond interest is not only recorded when it is paid but also as it accrues. For example, if a city owes $400,000 annually in bond interest, but only four months of the six-month payment period have elapsed at year-end, it must accrue the proportional interest expense and interest payable. This accrual ensures that liabilities are not understated and that expenses are matched to the proper reporting period.
Debt Repayment Reduces Liabilities, Not Expenses
In government-wide financial statements, principal repayment on long-term debt is not shown as an expense. Instead, it decreases the liability on the statement of net position. Only interest payments are reported as an expense in the statement of activities.
For example, if a city pays $2 million of principal and $600,000 of interest on its general obligation bonds, the $2 million reduces bonds payable on the statement of net position, while the $600,000 appears as an interest expense. This treatment reflects how debt reduces obligations rather than representing a cost of operations.
Pulling It Together
When preparing the government-wide statement of net position from trial balances and supporting documentation, you are essentially transforming fund-based records into a long-term, accrual-based presentation. That means:
- Recording capital assets at the correct basis (cost or fair value) and reducing them for depreciation.
- Separating activities into governmental or business-type categories.
- Accruing interest and other expenses to the reporting period.
- Reporting debt principal repayments as liability reductions, not expenses.
These steps ensure the government-wide statement of net position provides a clear picture of the government’s long-term financial position and its capacity to deliver services in the future.
