The compliance and liquidity approach, which holds sway in governmental fund accounting and financial reporting, guides how long term obligations and assets are handled. According to this model, the accounting and financial statements (chapter 3, lesson 4) for governmental activities should show
This logic means that long term obligations and assets are relevant for the financial statement for governmental funds only when they involve an exchange of cash. If, for example, a payment is not due for two years on a bond, then that obligation has little impact on the governmental funds in the financial statements. Conversely, if a large payment comes due during the year that can have a significant impact on the budget and financial statements.
An example shows how the compliance and liquidity model affects handling of long term items.
Government Name Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Ended 12/31/x0 &nb sp; Capital &nb sp; Projects &nb sp; -------- Revenues: intergovernemtal grant ............... 50,000 Expenditures: capital outlays ...................... 1,050,000 Other financing sources: bond proceeds ........................ 1,000,000 Excess of revenues and other financing sources over expenditures . 0 Fund balance - 1/1 ................... 0 Fund balance - 12/31 ................. 0Notice that this statement is an operating statement and thus similar to an income statement in business. However, even though revenues are nowhere near the expenditures ($50,000 in revenues compared to $1,050,000 in expenditures) and even though all the outlay ($1,050,000) has been accounted for in the year of the expenditure the fund shows a zero excess and zero fund balance. Since balance is sought in measuring government financial performance, the resulting "no surplus or deficit" is acceptable. In essence the balance is achieved by including the borrowing with the revenues to offset the expenditures.
The fact that the government borrowed a million dollars must be noted some place. It goes in an account groups which is simply a list of long term fixed assets and long term debts. An example of the account groups is presented.
Government Name Balance Sheet 12/31/x0 &nb sp; Account Groups General & nbsp; Long fixed &nb sp; term assets &n bsp; debt ------ &n bsp; ---- Assets: equipment ........................ 1,050,000 amount available ................. 0 amount to be provided ............ 1,000,000 Total assets 1,050,000 1,000,000 Liabilities and Fund Equity: Liabilities bonds payable .................... 1,000,000 Fund Balance investment in fixed assets (CPF).. 1,050,000 Total liabilities and fund balance 1,050,000 1,000,000 CPF is capital project fundThe million dollars of debt is represented as bonds payable, but the amount is simply listed. The only thing backing that debt in this case is the full faith and credit of the government in the form of the item called amount to be provided . Amount to be provided means the government will either have to raise taxes, borrow, or get revenue in the future to cover the debt. The interest due could be paid from the general fund or from a debt service fund if the interest were due this period.
The asset purchased is also listed and offset against the source of the money, the capital project fund (CPF). Generally, no depreciation is taken and thus the cost of the long term asset is not systematically allocated to periods that might benefit from the use of the asset.
This is an example of off balance sheet financing that can take place with the compliance and liquidity model as it is used for governmental funds . The debt is not placed in any of the balance sheets of the governmental funds until due. If the debt were placed in any of the balance sheets of the governmental funds, the funds would have to have assets of some sort to off set the debt, otherwise the fund would show a negative fund balance and possibility the potential for default.
The capital project example is repeated to show the workings of the accrual and consolidation model. The unit needs to earn $260,000 during the period to cover the:
Government Name Income Statement For the Period Ended 12/31/x0 Revenue: taxes 260,000 Expenses: interest 60,000 depreciation 200,000 total expenses 260,000 Net income 0In short, in order to match revenues and expense, the units needs $260,000 in revenues since the depreciation and interest are costs of the period whereas they are not in the compliance and liquidity model. Interest payment, that is, interest expenditure is not shown in the capital projects fund. It would more likely be an expenditure of the general fund or debt service fund. The usual purpose of the capital projects fund is to collect money and pay for the fixed asset. Other funds have responsibility for repaying the principal and interest. As a result, under the compliance and liquidity model, one might have to look in several funds or account groups as well as the notes to get a picture of cost of borrowing on the government.
The balance sheet rounds out the financial statements for this accrual and consolidation model.
Government Name Balance Sheet 12/31/x0 Assets: cash 200,000 vehicles 1,000,000 less depreciation 200,000 total assets 1,000,000 Liabilities bonds payable 1,000,000 Equity retained earnings 0 Liabilities & equity 1,000,000The reason for the $200,000 in cash among the assets follows from the $260,000 in revenues which was $200,000 more than the actual cash outlay (depreciation, 200,000 is not an actual cash outlay) that year (260,000 in revenue - 60,000 in actual cash outlays for interest expense = 200,000 in cash).