In this video, we walk through 5 FAR practice questions teaching about the government accounting measurement focus and basis of accounting. These questions are from FAR content area 1 on the AICPA CPA exam blueprints: Financial Reporting.
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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Government Accounting Measurement Focus and Basis of Accounting
Introduction to Fund Accounting
Fund accounting in government financial management is used to segregate financial resources and activities for specific purposes or objectives. This approach ensures that financial activities, such as those related to municipal water operations or public transit, are tracked and reported separately from other operations. Fund accounting is governed by the Governmental Accounting Standards Board (GASB), which establishes accounting principles for state and local governments in the United States.
Understanding Measurement Focus and Basis of Accounting
When discussing fund accounting, it’s essential to grasp two key terms: Measurement Focus and Basis of Accounting:
- Measurement Focus: Refers to what is being measured—either the current financial resources available or the economic resources as a whole.
- Basis of Accounting: Determines when revenues and expenditures are recognized—either using the modified accrual basis (for governmental funds) or the accrual basis (for proprietary and fiduciary funds).
Current Financial Resources Measurement Focus and Modified Accrual Basis of Accounting
Governmental funds focus on the short-term financial resources available to cover current obligations. These funds use the current financial resources measurement focus and the modified accrual basis of accounting. Under this basis, revenues are recognized when they are measurable and available, and expenditures are recorded when the related liability is incurred.
The governmental funds include:
- General Fund: The main operating fund, used for general government activities not accounted for elsewhere.
- Permanent Fund: Used for resources that are legally restricted, where only the earnings (not the principal) can be used for government programs.
- Special Revenue Fund: Accounts for revenues that are legally restricted or committed to specific purposes other than debt service or capital projects.
- Debt Service Fund: Used to accumulate resources for, and pay, general long-term debt principal and interest.
- Capital Projects Fund: Accounts for financial resources used for the acquisition or construction of major capital assets, such as buildings or infrastructure.
Economic Resources Measurement Focus and Accrual Basis of Accounting
Both proprietary and fiduciary funds use the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recognized when incurred, regardless of the timing of cash flows. This method provides a complete picture of the financial health of these funds over time.
Proprietary Funds
Proprietary funds are used for activities that operate similarly to private businesses, where services are provided for a fee. These funds include:
- Enterprise Funds: Account for operations financed and operated similarly to private businesses, such as municipal utilities or public transportation systems.
- Internal Service Funds: Used to account for the financing of goods or services provided by one department or agency to other departments or agencies within the government on a cost-reimbursement basis.
Fiduciary Funds
Fiduciary funds account for resources the government holds in a trustee or agency capacity for others. These funds are not available for government use and include:
- Pension Trust Funds: Account for resources held in trust for employee pension and other post-employment benefits.
- Investment Trust Funds: Report the external portion of investment pools held by the sponsoring government.
- Private-Purpose Trust Funds: Used to report all other trust arrangements that benefit individuals, private organizations, or other governments.
- Custodial Funds (formerly Agency Funds): Account for resources held by the government in a purely custodial capacity.
Government-Wide Financial Statements
Government-wide financial statements provide a broad overview of a government’s financial condition. They aggregate financial data for all of the government’s activities, both governmental and business-type. These statements use the economic resources measurement focus and the accrual basis of accounting, offering a comprehensive view of the government’s financial position and activities as a whole. They include the:
- Statement of Net Position: Provides a snapshot of the government’s assets, liabilities, and net position at a given point in time.
- Statement of Activities: Shows the revenues and expenses for government and business-type activities, highlighting changes in the government’s net position.
It is important to note that fiduciary funds are excluded from government-wide financial statements because the resources they manage are held for the benefit of external parties and cannot be used for the government’s own programs.
Conclusion: Why is Fund Accounting Used?
Fund accounting is used in governmental financial management to ensure transparency, accountability, and the appropriate use of resources. It allows governments to segregate financial activities related to specific functions or objectives, such as public utilities or pension funds, providing a clearer picture of how public resources are used.
By dividing resources into different funds, governments can ensure that restricted resources are only used for their intended purposes and that financial reporting accurately reflects the financial health of the government. Fund accounting helps governments meet their obligations to taxpayers, bondholders, and other stakeholders by maintaining financial integrity.
