In actuality, each financial statement is for a fund. If a government has a 150 funds, there are potentially 150 statements of revenues, expenditures, and changes in fund balance for each of these funds. The same goes for the balance sheet . The names of the statements can change depending on the type of funds, but it is the number of funds that drives the number of statements that a government must keep. In the CARF , presentation is at very high level of aggregation , but even this aggregated presentation is driven by funds. For example, all the capital project funds and special revenue funds will be aggregated but the presentation will still be by funds.
The government funds are the most common and within the government funds, the general fund is always present. The general fund accounts for typical, day to day activities of government such as safety, recreation, and planning. The other funds have more specific roles. Special revenue funds are for activities the legislature wishes to track via a specific fund. Activities related to schools, highways, and parks are often placed into special revenue funds. Capital project funds are designed to track the money and spending for major physical projects, such as buildings. However, purchase or construction of assets with a life greater than a year can be placed in a capital project fund. As a result, the capital project fund is an area open to possible abuse. Uniforms, vehicles parts, and even supplies have been placed in capital project funds to permit paying for these not with revenues of the general fund but with borrowing done in the capital projects fund. The last government fund is the debt service fund. It is used to hold the money used to pay interest expense and principle on long term debt. GAAP does not require this fund. Often it is the lenders who require a debt service fund to make sure the money is being set aside for payment of interest and principle. At one time these funds were likely to be called sinking funds.
The four subfunds within the basic governmental category (general, special revenue, capital project, debt service) and the account groups can actually be designed to work together to operate and account for the diverse activities of government. For instance, the capital project funds can be used to account for the construction or purchase of a large building. This capital project fund might be used to track the money borrowed and spent for the building. The debt incurred would be recorded in the account group (specifically, the long term debt account group). The long term or fixed asset , that is, the building, would be listed in the account groups (namely, the fixed asset account group). As interest expense and principle came due, money could be transferred from the general fund to the debt service fund to pay the debt. That year the general fund would, presumably, have to raise enough revenue to transfer to the debt service fund to handle any interest expense and principle due. All this fund, interfund, and account group accounting is designed for control, and a literal kind of control. The legislature wants a building; a capital projects fund is set up to track money going in and out to acquire the building. Lenders want to be sure money is being put away to pay the debt, so a debt service fund is established. Since short term and long term activities are placed in different accounting devices, other funds and account groups must come into play, such as the long term fixed asset group and the long term debt account group.
Proprietary funds are becoming more popular as government is pushed toward a competitive model, with at least some of the push coming from those interested in reinventing government. Within the proprietary funds, there two subtypes -- internal service funds (ISF) and enterprise funds (EF). The ISF is designed for those occasions when one department sells to or services another department in the government. The ISF helps managers to decide on a fair charge so the fund can break even. In essence it should operate very much like a private firm. The EF is a government unit or agency that transacts business with firms or people outside the government. It can seek a profit but the profit is for purposes of replacing plant and innovating not for distributing dividends to shareholders.
The financial statements of these proprietary funds would look like those of a business rather than the government type funds just discussed. Unlike government funds, borrowing could not be used in the income statement (often called the statement of revenues, expenses, and changes in retained earnings and contributed equity). Proprietary funds also have a statement of cash flow to show the sources of cash (sales to customers, eg) and the use of cash (purchase of raw material, eg), again similar to business. They have a balance sheet which includes both short term and long term items.
Recently, proprietary funds have been criticized for misuse of intergovernmental grants. Some propriety funds have been accused of charging excess overhead to these grants. For example, a state or local government might have charged 20% for overhead in the past when they were charging to local revenues but increased that to more than 20% when they could charge the overhead to intergovernmental grants.
One of the concepts associated with fiduciary funds is expendable and nonexpendable money. An example is a donation made to sponsor scholarships. The original donation is nonexpendable. It is used to earn money via investing. The earning are expendable and are used to provide the scholarships.
Investment pools can also be a fiduciary fund. In this case one government can invest for many funds or governments. The assumption is that greater earnings can accrue with the larger pool. Recently, some problems have resulted when pool managers have invested in financial products with high risk. With high risk there is the potential for high return but also the potential for significant loss. The problem is not the pooled fund idea; it's either not understanding the risk or understanding it and taking it.
All funds of one type presented in summary form are referred to a the combined level. Each financial statement will have a combined level. Below the combined level is a more detailed level, with all the funds in a specific type. To differentiate it from the combined, it is called the combining. In the above example, all 10 funds within the special revenue would be presented separately under the title of combining. Finally, for someone who wants to look at each single and separate fund there is the individual fund statements. The latter, the individual fund presentation, is not necessary given in the CAFR. Failure to present individual funds seems ironic since the argument for a fund approach is to get a detailed picture.
In the CAFR, the top or highest level, called the combined, might look as follows:
Combined Statement of Revenues, Expenditures, and Changes in Fund
Balance -- All Government Fund Types for the Year Ended 12/31/19x0
Government Fund Types
general fund special revenue capital project debt service
If the special revenue fund has many funds
within it, it might look as follows:
Combining Statement of Revenues, Expenditures, and Changes in Fund
Balance -- All Special Revenue Funds for the Year Ended 12/31/19x0
parks gasoline lottery
An [actual Combining Statement]<!need to scan
this statement > of Revenues, Expenditures,
and Changes in Fund Balance -- All Special
Revenue Funds is presented for illustrative
purposes.
Of course, any one of these special revenue funds, such as parks, could be displayed separately. Separate display of all the special revenue funds would be highly unusual in a CAFR.