Long Term Obligations and Assets

Glossary for chapter IV of Financial Reporting in Government By Dr. John Sacco , George Mason University Revised Wednesday, November 26, 1997

account groups: Because governments make a sharp distinction between current and long term items, governmental financial statements need a place to put long term activities (i.e., assets and liabilities). Account groups are used for this purpose. Since account groups are consider memoranda, they do not need to follow strict accounting rules. For example, long debt may be back only by the full faith and credit (i.e., the taxing and borrowing power) not any current assets.
accounting cycle: Since financial reports are given each period (usually a year in government) there are a set of step (cycle) taken each period that result in the reports and preparation for the next period or cycle. The term cycle is used because every period there is a start and an end. In government the cycle usually starts with the budget, goes through the journal entries, adjusting entries, posting to the accounts, financial reports, and closings.
accounting rules: The phrase accounting standards is also used. However, the purpose is the same. In order to increase compatibility among governments issuing financial reports, rules or standards are established so that similar transactions and events will be handled similarly. For instance, what is the rule for handling real estate property tax. Is it included at the beginning of the year before the tax is actually collected or only as the tax is collected?
accounts: All the specific asset, liabilities, and fund balances are stored in the accounts. For there can be a cash account, a notes payable account, and reserve for employee retirement account. The accounts allow the chronological entries to be summarized by specific element, e.g., cash. In government, there will be a set of accounts for each fund.
accrual: In developing a conceptual framework for accounting and financial reporting, accrual recognizes transactions and events when the activity occur regardless of when the cash changes hands. As long as something is estimable and probable it is recognized. Estimating how much pension a person is due from working one year even though the person might not receive the pension for many years is an example of accrual.
actuarials: These are people trained mathematics, statistics and demographics. It is there job to estimate how long workers will stay on the job, when they will retire, and how long they will live after retirement. All these estimates are used to help determine the pension liabilities and other retirement type liabilities.
adverse opinion: This is a negative opinion rendered by the auditor when the auditor finds that the financial reports are not in compliance with generally accepted accounting principles (GAAP). This is one of the most serious negative opinions an auditor can render.
amount to be provide: This is a category in the general long term debt account group. It reflects how much of the general obligation debt is not covered by assets such as investments or cash. It is in essential a technical term for the full faith and credit of the government to pay back debt.
annual budget: Annual is a period of one year. In government, much of the accounting and financial reporting is geared to things that will happen and involve cash during the fiscal year. This focus is driven by the approval and execution of the annual budget. The budget covers the governmental decisions on how to raise money and where to spend it. Traditionally, one of the most public decisions in government. A government may have several budgets for the different funds in government. The budget for the general fund is usually the largest. Financial reports, which should assess financial performance, including compliance with budget, are not nearly as widely debated or circulated.
annuity: When payments, investments, or financial activities take place at the same amount and on a regular basis, those activities are called an annuity. A thousand dollar investment or payment every year for 5 years represents an annuity.
assets: Assets have future economic benefit. They will help a government or company in the operation of their activities. Cash, machinery, and patents are assets as long as they will yield future benefits.
audit: Many types of audits can be done but financial audits attempt to determine whether management adhered to GAAP in publishing official financial statements. Government audits include not only adherence to GAAP but also government laws and regulations.
bonds: Officially called debt securities, bonds provide ways for governments to raise large sums of money by borrowing. Bonds usually have a principle amount and a contract interest rate. The principle can be paid at maturity while the interest is generally paid semi-annually as a percent of the principle. For example, a government could see 10,000,000 in bonds with a 5% interest rate. If the bonds matured in five years, then the 10,000,000 would have to be paid to the bondholder. During that period, 500,000 would have to be paid in interest each year or 250,000 semi-annually. These bonds would be called term bonds since they are due at point in time. Serial bonds come due at different points in time.
capital lease: Leases can have various designations. A capital lease means that the unit leasing (leasee) the asset, in substance, has rights and obligations that are just as if the unit owned the asset. For example, if the unit promises to pay the lease for 10 years and that payment meets certain criteria then the leasee must treat the 10 year payment like a long term obligation. The unit cannot simply say it is only obligated for the forthcoming year.
capital project fund: This is a governmental fund that records the money coming in and going out for large projects, such as buildings, machinery, and large vehicles. It follows from the compliance orientation of governmental accounting. Legislature authorize a major project and might want it tracked in a capital project fund. Sometimes, however, government use capital project funds simply to borrow for items they cannot cover with general revenues.
capital project: A large effort resulting in a major asset such as construction of a building or purchase of a building is a capital project. The resulting asset will have a life of longer than a year and entail a major expenditure.
combining: A combining financial statement is at a second level of aggregation below the top or combined level. If each fund in a fund type is presented on one page this is a combining level. For example, if special revenue funds have three funds, parks, schools, and libraries, then the combining level would present the three on the same page.
compliance: Compliance assesses whether actual money raising and spending adhere to budget mandates set by the legislative body. All the financial statements can help judge compliance, but one in particular call budget versus actual is used to assess compliance. Historically, annual compliance with the budget has been the main factor shaping governmental financial reports.
compounding: When interest is earned on past interest this is called compounding. For instance, if there is 5% on $100 for a year, then the next year the interest will be not only on the $100 but on the 5 dollars of interest earned.
conditions: Financial conditions or position or health go mainly with the balance sheet. The idea behind the financial conditions is an assessment of whether the government has sufficient assets to cover its liabilities. Since governmental balance sheets are mainly for current or annual activities, conditions refer to whether current assets can cover current liabilities. However, long term liabilities can be introduced in a variety of ways to assess conditions. Long term debt can be compared to indicators of tax capacity to determine if a government is putting too much pressure on its capacity. Debt as a ratio of total real estate value is sometimes used to assess long term financial conditions.
cost benefit: This is a type of analysis that tries to determine if a project is economically worthwhile. The benefits (translated into dollars) should be greater than the costs. All dollars used are converted back to their present value so they are compatible.
credits: In this case, credits comes from the accounting terminology of debits and credits. It is simply used to balance a debit for the purpose of double entry accounting. For example, if a government took in 1,000 in revenue fees in the form of cash, the cash would be debited since cash is an asset and increases in assets are debited; the fees would be credited since fees are equity and any increase in equity is credited. A credit could represent an increase or decrease.
current: Essentially, the same as annual. In government, much of the accounting and financial reporting is geared to things that will happen and involve cash during the fiscal year. liquid assets: Essentially the same as liquidity. Liquidity refers to how quick an asset can be converted to cash. A three-month treasury note is probably more liquid than a backhoe, but probably less liquid than money in a checking account.
debt service fund: This is the fund were money is placed and invested to pay the principle and interest on debt, usually bonds. Sometimes the lenders, the legislators, or the managers demand that a the debt service fund be established so it is clear that money is being put away and invested to pay future debt.
debt: When a unit incurs an obligation to pay in the future it has a debt. Bonds, pensions, legal settlement, and even vacation time can be part of the debt of a government.
debts: In this case, debits comes from the accounting terminology of debits and credits. It is simply used to balance a credit for the purpose of double entry accounting. For example, if a government took in 1,000 in revenue fees in the form of cash, the cash would be debited since cash is an asset and increases in assets are debited; the fees would be credited since fees are equity and any increase in equity is credited. A debit could represent an increase or decrease.
deferred compensation: Employees often earn compensation that will be paid in the future. As long as the employee is working and meeting expressed conditions, the employee earns these future benefits. The benefit can include sick leave, vacation time, and retirement benefits.
defined benefits: One type of pension plan is called defined benefits. With defined benefits, the employer promises to pay the employee a certain amount of money at retirement regardless of whether the employer has adequately invested to address these promises. If not, then the employer must take the money out of its cash flow. The burden falls on the employer to meet the promise.
defined contribution: One type of pension plan is called defined contribution. With this plan employee get only what has been placed in the trust and what has been earned by the trust, no more, no less. The employer has no responsibility beyond what is in the contributed trust.
depreciation: The systematic allocation of the cost of property, plant and equipment, that is, fixed assets will material value and lives longer than a year.
derivatives: Contracts or investments that are based on the performance or value of a security such as a stock or bond are derivative. In other words, they are derived from a security but are not the security themselves.
discounted cash flow: Money has a cost or value just like other assets. The sooner money is received the better since it can be invested or put to productive use and earn more money. Bring back dollars earned at different points in time to the present is called discounted cash flow. The cash flow is discounted at some rate back to its present value so that all dollars regardless of when collected can be compared. The rate used in discounting the cash flow is generally the rate people think or want to earn on investments.
entity wide perspective: The traditional way of looking a governmental accounting is the fund, which segments jurisdictional financial activities into smaller, self contained categories. An entity wide perspective sums all the relevant activities for the entire jurisdiction regardless of the fund accounting for it.
fixed assets: They are also called property, plant and equipment. These are assets used to help run or operate the government. They are expected to last longer than a year. Specifically, they many include vehicles, buildings, and machines. Under ordinary circumstances, they are not expected to be converted to cash to pay bills.
flow of economic resources: With this focus, both current and long term items are included in the financial statements. Thus, a building would be included among the assets and depreciated over its useful life. With the flow of financial resources focus, only assets that are cash or can be readily converted to cash (i.e., liquid assets) are included among the assets. Governmental funds use the flow of financial resources. Proprietary funds and commercial accounting under GAAP use the flow of economic resources.
full faith and credit: People who are creditors of government are often protected from loss by the full faith and credit of the government. This means that the government will either use future taxes or borrowing to pay off loans or bills. financial performance: Performance is used as an all embracing term to include financial success, conditions, and compliance. It is historical in perspective, referring to performance during a period (perhaps a year) just past.
fund balance: When liabilities are subtracted from assets, there is a fund balance. A positive fund balance means there are more assets than liabilities; a negative fund balance means just the opposite. Fund balance can be complicated by the fact that part of the fund balance is reserved and part unreserved. The difference between reserved and unreserved is that the unreserved can potentially be authorized for future expenditures while the reserved cannot. Additionally, the fund balance is a residual and not necessarily a cash amount.
fund equity: This a generic term used to say what is left after all the liabilities have been taken care of or paid with all the assets. In government, the term fund balance is more often used. Fund equity while conceptually the same as fund balance is usually reserved for funds in government that are operated on a business or accrual basis.
funds: One of the fundamental principles of governmental accounting is the fund. Funds are usually established by legislation and provide an accounting mechanism for keeping track of money raised and spent for a specific activity or set of activities. Governments have three broad type of funds and specific funds within those broad type of funds.
future value of $1: The compound rate at which a one time investment grows is given by the future value of $1. For example, the growth rate for $1 at 9% for 10 years is 2.3674. In other words, $1 invested at 9% for 10 will yield $2.3674. For any other amount, the amount is multiplied by 2.3674.
future value of an annuity: The compound rate at which a series of investment of equal value will grow is given by the future value of an annuity. For example, the growth rate for $1 invested every year for 10 years at 9% 15.193. In other words, $1 invested for each of 10 years at 9% yield $15.193. For amounts other than $1 per year, the amount is multiplied by 15.193.
GAAP: GAAP means Generally Accepted Accounting Principles. These are the principles that practitioners use to produce financial statements. They can become accepted via due process or via long term practice or both. It is the GAAP that help make financial statements compatible from year to year and jurisdiction to jurisdictions.
GASB: GASB stands for Governmental Accounting Standards Board. It was organized in 1984. Like FASB it falls under the umbrella of the Financial Accounting Foundation. It makes rules for state and local government and nonprofit organizations controlled by government. GASB is recognized by the Securities and Exchange Commission (SEC) as the rule making body for state and local government. It follows due process in that interested parities can comment before rules are accepted. GASB is independent in that its costs are covered by contributions.
general fixed assets account group: fixed assets, that is, major assets that have useful lives longer than a year are recorded in this group. The fixed asset is recorded along with the source providing the money for acquisition of the asset. These long term assets are associated with the activities of the governmental funds. No depreciation is required. The account group is simply a place to keep track of these major assets acquired by the governmental funds.
general fund: This is the governmental fund used for most of the routine and traditional activities of government, such as police, fire, tax collection, and general administration. The general fund is the most common of all funds. It keeps track of current activities.
general long term debt account group: This device provides a way for governments to list all the long term general obligation debt they have in an off balance sheet manner. In other words, the debt has no negative effect on the fund balances of the governmental funds. If sufficient assets are not available to cover the debt, it is covered by the full faith and credit of the government in the form of amount to be provided.
governmental funds: These include general, special revenue, capital project, and debt service. They measure how government is doing in the short term and often in comparison to the budget.
infrastructure: This items consists of the major physical components of a jurisdiction including the streets, bridges, aqueducts, and sewers, all of which are generally immovable. Infrastructure is differentiated from fixed assets which include property, and equipment, such as buildings, vehicles, and machinery.
interest: Interest is the cost for using money. In the case of bonds sold by government, there will likely be a contract interest rate. For instance, if the contract interest rate is 5% and the amount of bonds sold is 1,000,000 then the annual interest is $50,000.
investments: A broad term used to connoted savings or capital improvements instead of immediate consumption. The investment can in securities such as stocks and bonds or in fixed assets such vehicles and machinery. In business, purchase of inventory can also be considered an investment in the business that will pay off in terms of returns that are larger than the investment. Typically, investments refers to investment in securities. level of aggregation within funds: Since a single fund type can have many funds within it, the financial statements aggregate at different levels. The highest is combined and there only the fund type is shown (e.g., special revenue or capital projects). The next level is combining. Here each fund within a type is show but they are show in column format. Thus, if the capital projects fund has five separate funds these would be shown in column format as under the title, combining. If each fund were shown separately for each statement, the title would be individual.
journal entries: In keeping the detailed records of financial activities, these activities are placed in journals in chronological order. The entry can be to computer or to a manual system. From the journal the entries are posted to the accounts. In government all this is done by fund.
liabilities: Future obligations or scarifies constitute liabilities. An account payable or note payable can be a liability. So too can a pension or legal claim.
long term obligations: liabilities that come due more than a year from now. In business long term can mean more than a year or more than the operating cycle whichever is longer. market value: Market value is one methods for valuing assets, liabilities, or equity. Actually, there are several variations to arriving at market value, such as what is the market value if a unit is selling versus buying. More generally, it relates to what price an item would fetch in the market or in arms length bargaining when parties openly buy and sell. Since many items are not being sold, it is often difficult to place a market value on these items.
long term: Long term refers to a period lasting more than a year. Bonds, pensions, and even vacation benefits are often long term items.
maturity: Refers here to date when a security is due. A bond payable in 1999 on January 1st has 1/1/99 as it maturity date.
notes to the financial statements: The notes are consider integral to financial statements. The statements themselves are a quantitative presented; the notes are usually verbal elaborations, although notes can be numerical in nature. Notes explain or expand on the financial statements. For example, the notes may explain a change in accounting policy or sick leave and vacation policy.
obligations: The same as liabilities, that is, these are future sacrifices.
off balance sheet: This term refers to efforts by accounting units to keep obligations off the financial statements. If an action by an accounting unit is handled so it is not recorded in the financial statements then it has no impact on the statements. Ordinarily, the action is a liability that the unit try to keep off the financial statements, or specifically the balance sheet. Off balance sheet financing is common in government since the financial statements are designed to essentially capture annual, not long term items. For example, a building that was financed by long term borrowing would not create a liability in the funds until the interest and principle were due. If the principle were not due for five years then the funds would not show the liability until that time.
other financing sources: Inflows that increase equity or fund balance, but are not revenues. For example, the proceeds from a bond fall in the category of other financing sources. In other words they are not earned or legally demanded like a tax but during the annual budget period they can be used to off set expenditures in the statement of revenues, expenditures, and changes in fund balance. No similar category exists in business accounting.
other financing uses: These transactions decrease fund balance in a fashion similar to expenditures but are given a special category to show they are different from the expenditures of the fund. Transfer to another fund are other financing uses.
over funded: When the assets in a pension fund are greater than all the liabilities, the trust fund is said to be over funded.
pension trust fund: Keeps tract of all revenues, expenditures, assets and current liabilities of the pension fund. Long term liabilities are often present only in the notes and not in the pension trust fund statements.
pork barrel: Figure of speech used to characterize projects that are not necessarily economically viable but pursued because of their appeal or because of the power of the group demanding or requesting them. Physical project such as streets, roads, and water improvement often fall in this category.
portfolios: In investment terminology, portfolios refer to the mix of assets or investments that are owned by an entity. Sometimes the goal of a portfolio is to diversify high risk with low risk investments. Thus, U.S. government bonds might be in a portfolio along with overseas stocks.
present value
principal: The amount due independent of the interest. For a $1,000,000 loan with an interest of 10% the 1,000,000 is the principal and the 10%, or $100,000 annualized, is the interest.
qualified opinion: An auditor opinion that the financial statements follow generally accepted principle "except for" a particular significant exception. An auditor may find everything in order except taxes receivable. If the unit refuses to change to the auditors demands and the auditor feels that the taxes receivable are not in accordance with GAAP, then an qualified opinion is issued.
rating agencies: A number of companies assign a risk level to the bonds or debt issued by a government. Risk means the likelihood of default or nonpayment. The lower the risk of nonpayment, the lower the interest the government must pay. Some rating agencies give a AAA rating to the least risky government bonds.
return: In this case return the amount or percentage earned on an investment.
risk: The chance of losing the basic amount invested is the risk inherent in an investment.
schedules: Schedules also presented data in greater detail than it is presented in the financial statements. statistical tables: Presents comparative data, often for ten year periods and can include property values and population data.
statement of revenues, expenditures, and changes in fund balance: This is statement is designed to measure the operating success or results of the period. In government, operating success is achieved is enough money is brought in to cover the money going out. Money in can include borrowing and money out can include transfers. In business, operating success is based on revenues in excess of expenses.
statistical section: The section of the comprehensive annual financial report that has data on the jurisdiction. Often included is the population, tax base, and other economic or demographic information.
success: Financial success goes with the operating statement or operating results. It is measured by whether the government was able to raise enough money during a given period to cover its outlays. In government success is affected by annual and cash nature of the accounting rules. Inflows of money can include borrowing; outflow include only those due and payable, not those promised but not payable this period.
time value of money: The use of money has a cost or value just as other commodities do. Interest is that cost. As time elapse there is cost to using money. The sooner money is received the more valuable it is because it can be invested an earn interest.
transactions and events: These are the activities that the government captures or records in order to produce financial reports. Transactions are usually activities or exchanges between the government and outsiders or exchanges among funds. Events are things that occur but are not immediately recorded. A employee earns salary or wages every minute on the job, but this event is only recorded at set times.
under funded: If the assets in a pension trust fund are less than the total obligations then the pension is underfuned.