In this video, we walk through 5 BAR practice questions teaching about concepts and principles for government-wide financials. 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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Concepts and Principles for Government-Wide Financials
One of the foundational areas in governmental accounting is the government-wide financial statements. These statements provide a comprehensive view of a government’s financial health and operations, using principles similar to corporate financial reporting but tailored to public sector needs.
Let’s walk through the essential concepts, highlighting what you should be able to recall.
The Two Required Government-Wide Financial Statements
At the government-wide level, the required statements are:
- Statement of Net Position – reports all assets, liabilities, and net position of the government, similar to a balance sheet.
- Statement of Activities – reports revenues, expenses, and changes in net position, similar to an income statement.
For example, if you wanted to know the city’s total infrastructure assets, outstanding bonds payable, or overall unrestricted resources, you would look to the Statement of Net Position. On the other hand, if you wanted to see how much of the public safety function is covered through charges for services (like parking fines) versus how much depends on property taxes, you would look to the Statement of Activities.
Statement of Net Position: Components and Structure
The Statement of Net Position provides a snapshot at year-end and makes key distinctions:
- It separates governmental activities (such as public safety, health, and education) from business-type activities (such as utilities or airports).
- It places debt in the column of the activity that will repay it. For instance, utility bonds appear under business-type activities, while general obligation bonds appear under governmental activities.
- Net position is categorized into three components:
- Net investment in capital assets (capital assets minus related debt)
- Restricted net position (resources restricted by law or external parties)
- Unrestricted net position (all other resources available for use)
This structure helps financial statement users quickly identify the government’s capacity to fund future operations and its financial commitments.
Statement of Activities: Showing Program vs. General Revenues
The Statement of Activities highlights how individual functions are financed. It is not just a listing of revenues and expenses; instead, it is organized by program or function (such as public works, education, or transportation).
Program revenues fall into three categories:
- Charges for services (e.g., fees for licenses, utilities, or recreational facilities)
- Operating grants and contributions (resources restricted for specific operational purposes, such as federal education grants)
- Capital grants and contributions (funding for specific capital projects, like highway construction)
These are offset against program expenses to determine the net cost of each function. Any remaining shortfall is then financed by general revenues, such as property taxes, sales taxes, or unrestricted grants.
For example, a public library may generate charges for services through late fees and receive an operating grant to cover technology upgrades. However, its expenses will usually exceed those revenues, meaning the remainder is covered through general revenues like property taxes.
Measurement Focus and Basis of Accounting
Government-wide financial statements are prepared using:
- The economic resources measurement focus, which accounts for both current and long-term assets and liabilities.
- The accrual basis of accounting, which recognizes revenues when earned and expenses when incurred.
This is a major difference from governmental fund financial statements, which use the current financial resources focus and modified accrual basis, emphasizing only near-term inflows and outflows of spendable resources.
For instance, under government-wide reporting, a city would record its pension liability and depreciate its buildings, while under fund reporting, those long-term costs are not shown.
Which Funds Are Included?
A critical concept for the exam is understanding which funds feed into the government-wide statements:
- Included: Governmental funds (general, special revenue, capital projects, debt service, permanent) and proprietary funds (enterprise and internal service).
- Excluded: Fiduciary funds (pension trust, investment trust, custodial, private-purpose trust), because those resources are held in trust for others and not available to finance the government’s programs.
For example, if a county manages a pension trust for its employees, those assets appear only in fiduciary fund statements, not in the government-wide statements. But if the county operates a water utility, that activity is included in the business-type activities column of the government-wide statements.
Key Takeaways
- Government-wide reporting consists of two main statements: the Statement of Net Position and the Statement of Activities.
- The Statement of Net Position separates governmental and business-type activities, reports debt where repayment is expected, and categorizes net position as net investment in capital assets, restricted, or unrestricted.
- The Statement of Activities shows program revenues (charges for services, operating grants, capital grants) within each function, and highlights the reliance on general revenues.
- Government-wide reporting uses the economic resources focus and the accrual basis, unlike governmental fund reporting.
- Governmental and proprietary funds are included in government-wide statements, while fiduciary funds are excluded.
