#13

Terminology

Slides

http://www.cpaexcel.com/pv4/cpaexcel/publish?format=assignment&aid...

1 of 43 3/22/2012 2:33 PM


2 of 43 3/22/2012 2:33 PM


3 of 43 3/22/2012 2:33 PM

Studytext

Terminology

I. Account Terminology and Classifications

A. Revenue Classifications -- Revenues of governmental funds are classified by source. The mainrevenue source classes are:

1. Taxes - property, sales, income, and other taxes; penalties and interest on delinquent taxes;

2. Licenses and permits - motor vehicle permits, fishing permits, building permits, alcoholicbeverage licenses;

3. Intergovernmental - grants, shared revenues, and payments to other governments in lieu oftaxes;

4. Charges for services - building inspection fees, copying fees, recording fees;

5. Fines and forfeits - parking fines, traffic fines;

6. Investment earnings - usually on short term investments;

7. Miscellaneous - rents and royalties, escheats. (The net assets of deceased persons who diewithout a will and with no known relatives revert back to the state.)

B. Expenditure Classifications -- Most expenditures of governmental funds are authorized throughappropriations. During the budgeting process, appropriations are identified not just by the type ofexpenditure (i.e., salaries, supplies, utilities) but also by the purpose(s) of the expenditure and itsfunding source. In order to show compliance with the appropriations, expenditures must also be codedto identify these characteristics.

1. Fund -- The fund supplying the financial resources;

2. Program or function -- The broad purpose of the expenditure (i.e., public safety, education,health, etc.);

3. Activity -- A specific goal or objective under a program (i.e., child vaccination, low-incomehealth care, AIDS awareness, etc.);

4. Organizational unit -- The department or agency within the governmental entity that isresponsible for managing the expenditure (i.e., Community Clinic, Emergency Services, HealthDepartment, etc.);

5. Character -- Identifies the period of time benefited by the expenditure:

a. Current expenditures - benefit the current period only;

b. Capital outlay - benefits current and future periods;

c. Debt service - benefits past periods (and, potentially, current and future periods);

d. Intergovernmental transfers - non-exchange (and frequently mandatory) transfers ofresources from one governmental entity to another.

6. Object -- The 'natural' expense category, the specific purpose of the expenditures (e.g.salaries, supplies, and rent).

Note:


4 of 43 3/22/2012 2:33 PM

Of the six classifications listed, four are most frequently seen in CPA examquestions: Fund, Program/Function, Character, and Object.

Note:Expenditures in the Fund statements for the governmental funds arereported by character. Expenditures in the Government-widestatements for the governmental funds are reported by

program/function.

C. Special Terminology -- Used in Modified Accrual Basis Accounting.

1. Modified Accrual Basis -- Uses alternate titles for some common accounting terms:

a. Expenditures, not expenses -- Under modified accrual basis accounting, decreasesin net assets are called expenditures, not expenses;

b. Fund Balance, not Retained Earnings or Owner's Equity -- Under modifiedaccrual basis accounting residual equity is called Fund Balance, not Retained Earningsor Owner's Equity;

Note:The examiners frequently use these two terms to indicatewhich type of fund is being discussed.

If the question uses the terms Expenditures or Fund Balance, thenthe fund or report in question must be one of the GovernmentalFunds, as these are the only funds that use modified accrual basisaccounting.

If the question uses the terms Expenses or Retained Earnings, thenthe fund or report in question must be one of the Proprietary Funds orFiduciary Funds, as these are the only funds that use full accrual basisaccounting.

c. Vouchers Payable, not Accounts Payable -- The term Accounts Payable may bereplaced by the term Vouchers Payable in any of a governmental entity's funds. Nodifferences in treatment are signified by the alternate terminology;

d. Warrants, not checks -- The term check may be replaced by the term warrant in anyof a governmental entity's funds. No differences in treatment are signified by thealternate terminology.

D. Use of Control Accounts in Governmental Accounting --

1. Accounts such as Revenues, Estimated Revenues, Expenditures, Appropriations, andEncumbrances frequently have the word "Control" appended to the account title. The accounttitles "Revenues" and "Revenues Control" refer to precisely the same account (as do


5 of 43 3/22/2012 2:33 PM

"Expenditures" and "Expenditures Control", etc.).

2. The concept of a "control" account here is the same as in financial accounting when it is usedwith "Accounts Receivable Control."

3. The control account is a general ledger summary account that reflects the grand total balanceof the subsidiary ledger accounts.

4. For example, A/R Control represents the total dollar amount of the individual customeraccounts:

Cust 1 Cust 2 Cust 3 A/R Control

500 100 300 900

5. In government accounting, this concept is applied to the budgetary and actual revenue andexpenditure accounts: the account "Revenue Control" represents the total of the individualrevenue accounts:

Rev-Taxes __ Rev-Fines __ Rev-Licenses __ Revenue Control __

600 200 300 1100

Note:The form of the account name does not influence the answerto the question. A question about a revenue transaction may referto the revenue account as "Revenue Control," "Revenue" or "Zoning

Fee Revenue:" in all instances, the answer to the question would be the same.

II. GASB #33 - Accounting and Financial Reporting For Nonexchange Transactions

A. GASB #33 -- provides a comprehensive basis for recognizing nonexchange revenues such asproperty taxes, sales taxes, shared revenues, entitlements, and grants. It divides the revenues intofour classes of transactions and defines separate recognition criteria for each class.

1. Because GASB #33 is a full accrual basis standard and most nonexchange revenues arerecorded in governmental funds, application of the revenue recognition rules when recordingthe transactions and when reporting them in the Fund statements is a two stepprocess:

a. Determine whether revenue can be recognized under GASB #33 recognitionrules. If revenue cannot be recognized, there is no need to go on to the secondstep: the transaction is recognized as deferred revenue;

b. If revenue can be recognized under GASB #33, then we must apply the modifiedaccrual basis recognition standards to determine whether revenue can be recordedin the (governmental) funds. If revenue cannot be recognized under modifiedaccrual basis as well as under GASB #33, then the transaction is recognized asdeferred revenue.


6 of 43 3/22/2012 2:33 PM

2. Again, this two step process is necessary because we use a full accrual basis standard to recordand report transactions in funds that use the modified accrual basis of accounting. For reportingin the Government-wide statements, which are presented on the full accrual basis, thistwo-step process is not necessary: transactions are evaluated using only GASB #33 rules.

Note:These timing differences create an ongoing set of adjustmentsbetween revenue recognized in the funds and reported in the Fundstatements and revenue reported in the Government-wide

statements.

Note:The examiners sometimes ask questions about nonexchange revenuerecognition in the Government-wide statements and sometimes askquestions about nonexchange revenue recognition in the Fund

statements and about when the transactions are recorded. Timing differencesfrom revenue recognized/not recognized in prior periods may complicate thesequestions. It is extremely important to read the question carefully todetermine which basis of accounting is being used before attemptingto answer the question.

B. Nonexchange Revenue Classifications -- The following four transaction classifications are used todefine and apply revenue recognition rules:

1. Imposed nonexchange revenues -- Government assessed amounts, such as propertytaxes, fines and interest on delinquent property taxes, are billed and charged to individuals andbusinesses.

a. Recognize revenue in the period for which the taxes are levied;

b. Recognize an asset (property taxes receivable) when there is an enforceableclaim or when payment is received (cash).

Example:Property Tax Example: The City of Wellston uses a calendar fiscalyear. In November, Year X, the City levied property taxes totaling$25 M to be used to finance the next fiscal year, Year Y. The taxes

were due by January 31, Year Y. The City posted collections as follows:

Through December 31, Year X: $1.5 M

Through December 31, Year Y: $20.0 M

January 1, 2002-February 28,Year Z $2.5 M

March 1, 2002-December 31,Year Z $1.0 M

According to GASB #33, all revenue would be recognized in Year Y


7 of 43 3/22/2012 2:33 PM

because the taxes were levied for use in Year Y. Note that when the taxesare levied in Year X, Deferred Revenue is credited because the revenuecannot be recognized until the following year. Therefore, theGovernment-wide statements would report:

Year X Deferred Revenue $25 M

Year Y Property Tax Revenue $25 M

Year Z No revenue - all previously recognized $0 M

In order to record the taxes in the General Fund, the requirements of modifiedaccrual basis accounting must be considered in addition to the GASB #33 rules(i.e., revenues must be received in cash within 60 days after the end of thefiscal year). This changes the timing of the revenue recognition. Revenue isrecorded in the General Fund and reported in the Fund statements asfollows:

Year X Deferred Revenue $25 M

Year Y Property Tax Revenue ($1.5M+$20.0M+$2.5M) $24 M

Year Z Property Tax Revenue (amount rec'd after 60 days) $1 M

2. Derived tax revenues -- Taxes resulting from the taxable exchange transactions ofindividuals and businesses. Principal examples are sales taxes and income taxes. Theserevenues differ from imposed revenues as the government does not know what the amount willbe until it receives the tax.

a. Recognize both assets and revenue at the time the underlying exchangetransaction takes place.

Example:Sales Tax Example: In December, Year X, merchants collected $58Min sales taxes. The merchants filed tax forms on January 31, Year Yand remitted $50M to the state. Because of a downturn in the

economy, it was expected that only $5M of the remaining $8M would becollected and that $5M would not be collected until April, Year Y.

The Government-wide statements report the net revenue in the period inwhich the underlying exchange transaction (e.g., the purchase of goods fromthe merchants) took place:

Year X: Sales Tax Revenue ($58M-$3M estimated uncollectible) $55 M

Year Y: nothing - all revenue recognized in the prior period $0 M

To record the taxes in the General Fund, we must consider the timing of thecash receipts in addition to the GASB #33 requirements. Thus, the sales taxeswould be recorded in the General Fund and reported in the Fundstatements as follows:

Year X: Sales Tax Revenue ($50M rec'd within first 60 days of YearY)

$50M

Year Y: Sales Tax Revenue ($5 M rec'd after first 60 days of Year Y) $5 M


8 of 43 3/22/2012 2:33 PM

Notice that the total amount of revenue recognized over the two-year period isthe same in the Government-wide statements as in the Fund statements. Onlythe timing of the recognition differs.

C. Government-mandated nonexchange transactions -- These are intergovernmental transfers ofresources including entitlements, shared revenues, and payments in lieu of taxes. Most of theseresources: 1) have restrictions on how they may be used; and 2) are only available to the recipiententity if they meet specific conditions known as "eligibility requirements."

1. Recognize both assets and revenue when all eligibility requirements have been met;

a. Eligibility requirements include achievement of specified objectives and timerequirements;

b. Generic eligibility requirements may be assumed to be met (i.e., in order to receivehighway funds, a state must have interstate highways in need of repair; even though nospecific repairs may be scheduled when the monies are received, eligibility is assumedto be met because it would be unusual not to have interstate highways in need ofrepair).

2. "On-behalf of" payments -- These are , by definition, recognized as revenue and as acorresponding expenditure. (For example, state governments may make the employerportion payments for elementary and secondary schools on behalf of the school districts inorder to provide equal pension benefits to teachers across the state.)

Example:Shared revenue example: A state is entitled to 40% of the federalgasoline tax collected on gas sales within its borders. The statereceives these monies directly from the retailers and periodically

remits 60% of the tax to the federal government. In order to be eligible toreceive these monies, the drinking age in the state must be no less than 21and the state must maintain all interstate highways within its borders at orabove a specified level of condition for the entire year.

If the drinking age in this state is below 21, the state may not recognizerevenue, even though it has the cash in its possession, because this specificeligibility requirement has not been met. This is the case both forreporting on the Government-wide statements and on the Fundstatements and for recording in the General Fund.

If the drinking age is 21, the state may recognize revenue immediatelyin the Government-wide statements even though it has not maintained allof the interstate highways at the specified condition level for the entire yearbecause this is a generic eligibility requirement and the presumption is thatit will be met. Revenue reporting in the Fund statements and recordingin the General Fund is dependent upon the timing of the receipt of cash.


9 of 43 3/22/2012 2:33 PM

D. Voluntary nonexchange transactions contracts -- Entered into voluntarily by the participantswhich may include individuals and/or other governmental entities; this classification includescompetitively awarded grants, cash and/or property contributions or bequests, andendowments; frequently subject to use/purpose restrictions and/or eligibilityrequirements;

1. Recognize both assets and revenue when all eligibility requirements have been met:

a. The existence of purpose restrictions does not affect revenue recognition;

b. For reimbursement/expenditure-driven grants, reimbursement requirements areconsidered to be eligibility requirements, so revenue is not recognized until theexpenditure is made;

c. Endowments, which could be considered to have an indefinite time restriction, areexplicitly required to be recognized as revenue upon receipt.

Example:Bexar City received a $100,000 grant from the Alliance for Educationto be used to provide reading programs at neighborhood recreationcenters. In order to receive these monies, the city must operate

programs in at least three recreation centers, each with an enrollment of atleast 30 children between the ages of 5 and 7. Bexar currently operates twocenters with substantially more than 30 children within the required age rangeenrolled in programs. It plans to open a third center in two months andanticipates an enrollment of 5-7 year olds sufficient to meet the grantrequirement.

When the grant monies are received, they cannot be recognized asrevenue in either the Government-wide or Fund statements because thespecific eligibility requirements have not been met. As soon as the thirdcenter is completed and enrollments have reached the specified level (i.e., theeligibility requirements have been met), revenue can be recognized inboth the Government-wide and the Fund statements.

E. Other considerations affecting revenue recognition -- Resources from nonexchangetransactions often have timing restrictions (restrictions on when the resources are to be used) andpurpose restrictions (restrictions on how the resources are to be used).

1. Time restrictions -- Resources may not be used until a specific date or event has takenplace, and revenue must not be recognized until the time requirement has been met;

2. Purpose restrictions -- When resources must be used for specific purposes, revenue isrecognized immediately; limitations to the availability of the resources are shown byreporting a reservation of fund balance (fund-based statements) or a restricted netasset (government-wide statements).


10 of 43 3/22/2012 2:33 PM

FlashcardsFlashcard #1 (FC6388)

True or False: A Federal grant for education is anexample of a government mandated nonexchangetransaction.

This is a true statement.

Flashcard #2 (FC6387)

True or False: Property taxes is an example of animposed nonexchange transaction.



True or False: Sales tax is an example of a derived taxrevenue that is based on an underlying exchange.



List the categories of nonexchange transactions.Derived tax revenues;1.Imposed exchange revenues;2.Government-mandated nonexchangetransactions;

3.

Voluntary nonexchange transactions.4.


What expenditure classification identifies theexpenditure by the period of time benefited by theexpenditure?

Character (Debt Service, Current, Capital Outlay.)


What expenditure classification identifies theexpenditure by the broad purpose of the expenditure?

Program or Function.


List the two items that cause deferral of recognition ofnon-exchange revenue under Governmental AccountingStandards Board Statement (GASBS) 33.

Failure to meet:

Time restrictions; or1.Eligibility requirements.2.


11 of 43 3/22/2012 2:33 PM

Proficiency Questions

Question #1 (PQ5873)

Activity is a characteristic that identifies the period of time benefited by the expenditure.

True

False


In order to show compliance with the appropriations, expenditures must also be coded to identifythree specific characteristics.

True

False


A control account is a general ledger summary account which reflects the grand total balance of thesubsidiary ledger accounts.

True

False


Under modified accrual basis accounting, decreases in net assets are called expenditures, notexpenses.

True

False


During the budgeting process, appropriations are identified not just by the type of expenditure butalso by the purpose(s) of the expenditure and its funding source.

True

False


Most expenditures of the governmental funds are authorized through appropriations.

True

False



12 of 43 3/22/2012 2:33 PM

Resources from nonexchange transactions often have timing restrictions.

True

False


When resources must be used for specific purposes, revenue is recognized immediately.

True

False


All eligibility requirements must have been met before both assets and revenue can be recognized.

True

False


Government-mandated nonexchange transactions are intergovernmental transfers of resourcesincluding entitlements, shared revenues, and payments in lieu of taxes.

True

False


Derived tax revenues are taxes resulting from the taxable exchange transactions of individuals andbusinesses.

True

False


Imposed nonexchange revenues are government assessed amounts billed and charged to individualsand businesses, such as property taxes and delinquent property taxes.

True

False


GASB #33 provides a comprehensive basis for recognizing nonexchange revenues such as propertytaxes, sales taxes, and shared revenues. Entitlements and grants are not included in GASB #33.


13 of 43 3/22/2012 2:33 PM

True

False


GASB #33 is a four step process.

True

False


If revenue cannot be recognized under modified accrual basis as well as under GASB #33, then thetransaction is recognized as deferred revenue.

True

False


Derived tax revenues are recognized at the time the underlying exchange transaction takes place.

True

False


14 of 43 3/22/2012 2:33 PM

Past Exam Questions

Question #1 (AICPA.021105FAR-AR)

Chase City imposes a 2% tax on hotel charges. Revenues from this tax will be used to promotetourism in the city. Chase should record this tax as what type of NonExchange Transaction?

A. Derived Tax Revenue.

B. Imposed Nonexchange Revenue.

C. Government-Mandated Transaction.

D. Voluntary NonExchange Transaction.


During the current year, Knoxx County levied property taxes of $2,000,000, of which 1% is expectedto be uncollectible. The following amounts were collected during the current year:Prior year taxes collected within 60 days of the current year $ 50,000

Prior year taxes collected between 60 and 90 days into the current year 120,000

Current taxes collected in the current year 1,800,000

Current taxes collected within the first 60 days of the subsequent year 80,000

What amount of property tax revenue should Knoxx County report in its entity-wide Statement ofActivities?

A. $1,800,000

B. $1,970,000

C. $1,980,000

D. $2,000,000

Question #3 (AICPA.900559FAR-TH-AR)

Fixed assets donated to a governmental unit should be recorded:

A. As a memorandum entry only.

B. At the donor's carrying amount.

C. At estimated fair value when received.

D. At the lower of donor's carrying amount or estimated fair value when received.

Question #4 (AICPA.083763FAR-SIM)

Which account should Excel City credit when it issues a purchase order for supplies?

A. Appropriations control.

B. Encumbrance Control.

C. Vouchers Payable.

D. Reserve for Encumbrances.


15 of 43 3/22/2012 2:33 PM


Which of the following revenues can be recorded when bills are mailed rather than when they areactually received?

A. Property taxes.

B. Licenses and Permits.

C. Fines and Forfeits.

D. Service Charges.


In which fund would "Salaries Expense" appear?

A. Water Utility Fund.

B. General Fund.

C. Pension Trust Fund.

D. Capital Projects Fund.


In which fund would "Supplies Expenditure" appear?

A. Agency Fund.

B. General Fund.

C. Internal Service Fund.

D. Enterprise Fund.


"Supplies" is an expenditure classified at the _________ level.

A. Fund.

B. Function.

C. Character.

D. Object.

Question #9 (AICPA.101164FAR)

What is the major difference between an Exchange Transaction and a non-Exchange Transaction forgovernmental units?

A. The relationship between the amount of value given and received.

B. Time requirements and whether the transaction is required by law.

C. Purpose restrictions placed upon fund balances.


16 of 43 3/22/2012 2:33 PM

D. Whether resources acquired can be further exchanged.


17 of 43 3/22/2012 2:33 PM

Proficiency Question Answers

Question #1 : False

Question #2 : False

Question #3 : True

Question #4 : True

Question #5 : True

Question #6 : True

Question #7 : True

Question #8 : True

Question #9 : True

Question #10 : True

Question #11 : True

Question #12 : True

Question #13 : False

Question #14 : False

Question #15 : True

Question #16 : True


18 of 43 3/22/2012 2:33 PM

Past Exam Question Answers


A. (Correct!) GASB Stmt. #33 defines derived tax revenues as Nonexchange Revenues that are based on (orderived from) Exchange Transactions. Other examples of derived non-Exchange Transactions include sales taxes andincome taxes.

B. GASB Stmt. #33 defines Imposed Nonexchange Revenues as amounts that are assessed against and billed totaxpayers by the government entity. The most common example of an Imposed Nonexchange Revenue is PropertyTax Revenue.

C. GASB Stmt. #33 defines government mandated Nonexchange Transactions as legally mandated transfers ofresources among governmental entities. Use of these resources is restricted to the purposes defined in thelegislation. Revenue sharing monies and entitlements are examples of Government-Mandated NonexchangeTransactions.

D. GASB Stmt. #33 defines voluntary NonExchange Transactions as transfers of resources resulting from acontractual agreement willingly entered into by two or more entities. These resources must be used for purposesspecified in the contract.Grants are the primary examples of this type of transaction.


A. This answer is not correct because it recognizes Revenue only for taxes collected in cash during the current year.The Entity-Wide Statements are presented on the full accrual basis and, hence, used GASB #33 revenue recognitionrules. GASB #33 requires that property taxes net of the estimated uncollectible taxes be recognized as Revenue inthe year for which they were levied, regardless of when cash is actually collected.

B. This answer is not correct because it includes Revenue recognition for collection of prior year taxes. Theentity-wide statements are presented on the full accrual basis and, hence, used GASB #33 revenue recognition rules.GASB #33 requires that property taxes net of the estimated uncollectible taxes be recognized as Revenue in the yearfor which they were levied, regardless of when cash is actually collected.

C. (Correct!) The entity-wide statements are presented on the full accrual basis and hence used GASB #33 Revenuerecognition rules. GASB #33 requires that property taxes net of the estimated uncollectible taxes be recognized asRevenue in the year for which they were levied, regardless of when cash is actually collected.

D. This answer is not correct because the gross tax levy must be reduced for the estimated uncollectible taxes. Theentity-wide statements are presented on the full accrual basis and, hence, used GASB #33 revenue recognition rules.GASB #33 requires that property taxes net of the estimated uncollectible taxes be recognized as Revenue in the yearfor which they were levied, regardless of when cash is actually collected.

Question #3 (AICPA.900559FAR-TH-AR)

A. Donated fixed assets should be recorded in the fund to which they relate or in the General Fixed Asset accountgroup, as appropriate, at their estimated fair value when received. GASB 1400.113

B. Donated fixed assets should be recorded in the fund to which they relate or in the General Fixed Asset accountgroup, as appropriate, at their estimated fair value when received. GASB 1400.113

C. (Correct!) Donated fixed assets should be recorded in the fund to which they relate or in the General Fixed AssetAccount group, as appropriate, at their estimated fair value when received. GASB 1400.113

D. Donated fixed assets should be recorded in the fund to which they relate or in the General Fixed Asset accountgroup, as appropriate, at their estimated fair value when received. GASB 1400.113


A. The entry to record a purchase order is a debit to Encumbrances and a credit to Reserve for Encumbrances.Appropriation Control is used to record the original legally adopted budget, any subsequent revisions to the budget,and to close out the budget at year-end.

B. The entry to record a purchase order is a debit Encumbrances and a credit to Reserve for Encumbrances.

C. The entry to record a purchase order is a debit Encumbrances and a credit to Reserve for Encumbrances.Vouchers Payable is used to record invoices for goods and services received.


19 of 43 3/22/2012 2:33 PM

D. (Correct!) The entry to record a purchase order is a debit Encumbrances and a credit to Reserve forEncumbrances.


A. (Correct!) Property taxes are both objectively measurable and available to finance current period expendituresand, therefore, are "susceptible for accrual," and revenues are recorded prior to when cash is collected.

B. Property taxes are both objectively measurable and available to finance current period expenditures and,therefore, are "susceptible for accrual," and revenues are recorded prior to when cash is collected. Licenses andpermits are not objectively measurable.

C. Property taxes are both objectively measurable and available to finance current period expenditures and,therefore, are "susceptible for accrual," and revenues are recorded prior to when cash is collected. Fines and forfeitsare not objectively measurable.

D. Property taxes are both objectively measurable and available to finance current period expenditures and,therefore, are "susceptible for accrual," and revenues are recorded prior to when cash is collected. Service chargesare not objectively measurable.


A. (Correct!) "Expense" is a term reserved for funds that use full accrual accounting. A Water Utility Fund is anEnterprise Fund type using full accrual accounting.

B. "Expense" is a term reserved for funds that use full accrual accounting. A Water Utility Fund is an Enterprise Fundtype using full accrual accounting. The General Fund is a Governmental Fund type that uses modified accrual and theterm "expenditures."

C. "Expense" is a term reserved for funds that use full accrual accounting. A Water Utility Fund is an Enterprise Fundtype using full accrual accounting. Pension Trust Funds are Fiduciary Funds. Pension Trust Funds account for theassets of others (i.e., current and retired employees) and salaries expense should not appear in this fund type.

D. "Expense" is a term reserved for funds that use full accrual accounting. A Water Utility Fund is an Enterprise Fundtype using full accrual accounting. The Capital Projects Fund is a Governmental Fund type that uses modified accrualand the term "expenditures."


A. "Expenditure" is a term reserved for funds using the modified accrual basis of accounting. Governmental Fundtypes, including the General Fund, use the modified accrual basis of accounting. Agency Funds are Fiduciary Fundtypes that use full accrual accounting.

B. (Correct!) "Expenditure" is a term reserved for funds using the modified accrual basis of accounting.Governmental Fund types, including the General Fund, use the modified accrual basis of accounting.

C. "Expenditure" is a term reserved for funds using the modified accrual basis of accounting. Governmental Fundtypes, including the General Fund, use the modified accrual basis of accounting. Internal Service Funds areProprietary-type Funds and use full accrual accounting.

D. "Expenditure" is a term reserved for funds using the modified accrual basis of accounting. Governmental Fundtypes, including the General Fund, use the modified accrual basis of accounting. Enterprise Funds areProprietary-type Funds and use full accrual accounting.


A. "Supplies" is one of the object class of expenditures, which describes the type of item purchased or serviceobtained. The fund class of Expenditure describes the fund that accounted for the expenditure (e.g., General Fund).

B. "Supplies" is one of the object class of expenditures, which describes the type of item purchased or serviceobtained. Functional classes of Expenditure describe the department or organization unit associated with theexpenditure (e.g., Public Safety).

C. "Supplies" is one of the object class of expenditures, which describes the type of item purchased or serviceobtained. Character classes of Expenditures describe period or periods benefited (i.e., current operating, capitaloutlay, debt service) or as intergovernmental.

D. (Correct!) "Supplies" is one of the object classes of expenditures, which describe the type of item purchased or


20 of 43 3/22/2012 2:33 PM

service obtained.

Question #9 (AICPA.101164FAR)

A. (Correct!) Exchange Transactions involve a direct relationship between the charge and the service. NonexchangeTransactions, which are frequent in governments, do not have this relationship (e.g., taxes and fines).

B. Exchange Transactions involve a direct relationship between the charge and the service. NonExchangeTransactions, which are frequent in governments, do not have this relationship (e.g., taxes and fines). A timerequirement is a feature of an Exchange Transaction. Rather, a time restriction will affect the Net Asset categoryclassification of the transaction in the Government-Wide Financial Statements (temporarily restricted, permanentlyrestricted, and unrestricted). A transaction that is required by law is an example of a Government-MandatedNonexchange Transaction, which is one of four types of Nonexchange Transactions.

C. Exchange Transactions involve a direct relationship between the charge and the service. NonexchangeTransactions, which are frequent in governments, do not have this relationship (e.g., taxes and fines). Under GASBStatement no. 54, purpose restrictions on fund balances would cause the amount to be classified as a Restricted FundBalance but this is not a distinction between Exchange and Nonexchange Transactions.

D. Exchange Transactions involve a direct relationship between the charge and the service. NonexchangeTransactions, which are frequent in governments, do not have this relationship (e.g., taxes and fines).


21 of 43 3/22/2012 2:33 PM

Special Items - Recent Developments

Slides


22 of 43 3/22/2012 2:33 PM


23 of 43 3/22/2012 2:33 PM


24 of 43 3/22/2012 2:33 PM


25 of 43 3/22/2012 2:33 PM


26 of 43 3/22/2012 2:33 PM

Studytext

Special Items - Recent Developments

I. Statements

The following statements have been issued and/or implemented by GASB during the past years. Thoughsome of these topics have been addressed in other parts of the study text, they are included in this sectionbecause, historically, the Board of Examiners tends to include questions on new statements more oftenthan they might otherwise warrant.

II. GASBS #49 - Accounting and Reporting for Pollution Remediation Obligations

Many state and local governments are faced with high costs in their attempts to remediate existingpollution problems. Note, that the statement does not address costs associated with control or preventionof future pollution problems. This standard was issued November 2006 and is effective for financialstatement periods beginning after December 15, 2007.

A. Liability Recognition Triggers -- The government must recognize a liability for pollutionremediation if the cost can be reasonably estimated and one of the following five events occurs:

1. Pollution poses an imminent danger to the public or environment and a government haslittle or no discretion to avoid fixing the problem.

2. The government has violated a pollution prevention-related permit or license.

3. The government has been identified by a regulator (i.e., the Environmental ProtectionAgency (EPA)) as being responsible (or potentially responsible) for cleaning up pollution, orfor paying all or some of the cost of the clean up.

4. An outcome (or likely outcome) of a lawsuit will compel the governmental entity toaddress a pollution problem.

5. The government begins to clean up pollution or conducts related remediation activities(or the government legally obligates itself to do so).

B. Expense or Expenditure Recognition -- Recognition of the expense varies with the fundresponsible for the cleanup costs.

1. Government-wide Financial Statements and Proprietary Fund Statements -- Reportexpenses as the liability related to the pollution remediation is accrued. As the work ispreformed and payments are made, the liability is reduced.

2. Governmental Fund Statements -- Report expenditures when the payment for thecleanup is made.

C. Capitalization of Pollution Remediation Costs -- Not every pollution remediation is recognizedas an expense. Pollution remediation costs can instead be capitalized when they are used for thefollowing:

1. Prepare property for sale in anticipation of a sale;

2. Prepare property for use when the property was acquired with known or suspectedpollution that was expected to be remediated;

3. Perform pollution remediation that restores a pollution-caused decline in serviceutility, which was previously recognized as an asset impairment;

4. Acquire property, plant, and equipment that has a future alternative use other thanremediation efforts.


27 of 43 3/22/2012 2:33 PM

III. Other Postemployment Benefits

The GASB has recently issued several statements covering the reporting and disclosure of OtherPostemployment Benefits - that is, retirement benefits such as health insurance, life insurance, long-termdisability insurance, etc. - and the disclosure requirements for both pensions and other postemploymentbenefits. The measurement and disclosure requirements of the Statements are related, and disclosurerequirements are coordinated to avoid duplication when an OPEB plan is included as a trust or agency fundin an employer's financial report.

A. GASBS #43 - Financial Reporting for Postemployment Benefit Plans;

B. GASBS #45 -Accounting and Financial Reporting for Employers for PostemploymentBenefit;

C. GASBS #50 - Pension Disclosures: An Amendment of GASB Statements No. 25 and No. 27- Issued May 2007 and effective for periods beginning after June 15, 2007.

Note:Because all three of these related statements have recently beenimplemented it is highly likely that accounting for OPEB will be regularlytested on the exam for the next several years. Recognition and reporting

requirements for OPEB are basically the same as requirements for pensions: theserequirements are discussed in detail in the Study Text for Pension Trust Funds.

D. Financial Reporting for Postemployment Benefit Plans -- This Statement prescribesreporting requirements for postemployment benefits that mirrors the reporting requirements forpensions.

1. Two financial statements are required to report the current financial information about planassets:

a. Statement of Plan Net Assets;

b. Statement of Changes in Plan Net Assets.

2. Two schedules are required to provide actuarially determined historical trend informationabout the status of the plan:

a. Schedule of Funding Progress;

b. Schedule of Employer Contributions.

E. Reporting Postemployment Benefit Costs for Employers -- This Statement establishesstandards for the measurement, recognition, and display of OPEB expense/expenditures and relatedliabilities (assets) and note disclosures. Prior to the issue of this Statement, most organizationsrecognized OPEB on a pay-as-you-go basis. The Statement requires organizations to recognize thecost of these benefits during the period that they are earned. In general, reporting for OPEB followsreporting requirements for pension benefits. That is:

1. Annual OPEB cost is equal to the employer's annual required contribution to the plan (ARC) -which is an actuarially computed value.

a. The Government-wide Statements and the Proprietary Fund Statements both report


28 of 43 3/22/2012 2:33 PM

the OPEB cost as an expense of the current period.

b. The Governmental Fund Statements report only the amount actually contributed as acurrent period expenditure.

2. The Net OPEB obligation is equal to the cumulative difference between the annual OPEB costand the employer's contributions to the plan.

a. Retroactive application of these measurement requirements is not required;therefore, the OPEB liability at the beginning of implementation of the Statement willbe zero.

F. Reporting Pension and OPEB Plan Status -- Note disclosures and RSI requirements forpensions and OPEB are very similar after the implementation of GASBS # 50.

1. Notes to the Financial Statements -- The actuarial methods and assumptions used in themost recent actuarial valuation should be disclosed in the notes, rather than in the RSI. Thefunded status of the plan should be disclosed in the notes but should reference the morecomplete information contained in the Schedule of Funding Progress in the RSI.

2. Required Supplementary Information -- When actuarial values are used to calculatethe Annual Required Contribution (ARC) to the plan, as is the case for virtually all definedbenefit pension plans and OPEB, a Schedule of Funding Progress should be presented in theRSI along with a Schedule of Employer Contributions. Both schedules use actuarialcalculations to determine the value of the plan assets, as well as the plan liability. Theactuarial valuation is required every two years for plans with a total membership of 200 ormore and every three years for plans with less than 200 members. (See the Pension Truststudy text for details relating to these schedules.)

IV. GASBS #51 - Accounting and Financial Reporting for Intangible Assets

GASBS #51 was issued to resolve inconsistencies that had developed in accounting and financial reportingfor intangible assets. The types of intangible assets held by governments include the following: waterrights, timber rights, patents, trademarks, computer software, and easements. Easements are mentionedin GASBS #34 (paragraph 19) as a type of capital asset, and it is this reference that is considered thesource of the inconsistencies in accounting for intangible assets observed in practice. Issued June 2007 andeffective for financial statement periods beginning after June 15, 2009.

A. Characteristics of intangible assets -- An intangible asset is an asset that possess all of thefollowing characteristics:

1. Lack of physical substance -- The asset may be contained in, or on an item of, physicalsubstance (e.g., software on a computer disc) or closely associated with another item thathas physical substance (e.g., the underlying land in the case of a right-of-way). These modesof containment and associated items are not considered when determining whether an assetlacks physical substance.

2. Nonfinancial nature -- The asset is not in monetary form nor does it represent a claim orrights to assets in monetary form.

3. Initial useful life extending beyond a single reporting period.


29 of 43 3/22/2012 2:33 PM

B. Exceptions -- The provisions of GASBS #51 do not apply to the following intangible assets:

1. Those acquired or created for the purpose of obtaining income or profit - which should followguidance for investments;

2. Assets resulted from capital lease transactions reported by lessees;

3. Goodwill created through combination.

C. Recognition -- An intangible asset should be recognized in the statement of net assets, if it isidentifiable. One of the following two conditions must be met for intangible assets to be consideredidentifiable:

1. The asset is separable. It is capable of being separated or divided from the government andsold, transferred, licensed, rented, or exchanged;

2. The asset arises from contractual or other legal rights.

D. Internally Generated Intangible Assets -- Internally generated intangible assets arecapitalized only when all three of the following conditions are met. Outlays prior to meeting thethree conditions should be expensed as incurred.

1. The project is expected to provide an intangible asset upon completion of the project.

2. Technical or technological feasibility for completion of the project is demonstrated so that theintangible asset will provide its expected service capability.

3. The intention, ability, and presence of effort to complete or continue development of theintangible asset is demonstrated.

E. Internally Generated Computer Software -- Activities involved in developing and installinginternally generated computer software can be grouped into three stages:

1. Preliminary project stage: Activities include the conceptual formulation and evaluation ofalternatives, the determination of the needed technology, and the final selection ofalternatives. Treatment: expense.

2. Application development stage: Activities include design, software configuration andinterfaces, coding, hardware installation, and testing. Treatment: Capitalize.

3. Post-implementation/operation stage: Activities include application training and softwaremaintenance. Treatment: expense.

4. Activities in the preliminary project stage and the post-implementation/operation stageshould be expensed. Outlays in the application development stage should be capitalized;however, the following two criteria must be met in order to capitalize applicationdevelopment stage activities:

a. The activities in the preliminary project stage are completed;

b. There is an ongoing authorization and commitment to funding.

F. Modification of Computer Software -- Additional criteria must be met to capitalize outlaysassociated with an internally generated modification of computer software that is already inoperation. One of the following criteria must be met:

1. An increase in the functionality of the computer software;


30 of 43 3/22/2012 2:33 PM

2. An increase in the efficiency of the computer software;

3. An extension of the estimated useful life of the software.

G. Amortization -- The amortization period should not exceed the period of service capacityprovided in contractual or legal rights. Renewal periods related to such rights may be considered ifthere is evidence that the government will seek to achieve the renewal and that the outlaysassociated with the renewal are nominal in relation to the level of service capacity expected to beobtained by the renewal. An intangible with an indefinite useful life should not be amortized (e.g., apermanent right-of-way easement).

H. Effective date -- Financial statements for periods beginning after June 15, 2009. Appliedretroactively by restating financial statements for all prior periods presented. If the actual historicalcost of an intangible asset is not known, the government should report the estimated historical costfor intangible assets acquired after June 30, 1980.

V. GASBS #52 - Land and Other Real Estate Held as Investments by Endowments

Prior to this standard, permanent and term endowments reported land and other real estate held asinvestments at their historical cost. This statement requires that endowments report their land and otherreal estate investments at fair value. Changes in fair value should be reported as investment income.Effective date is used for financial statement periods beginning after June 15, 2008.

VI. GASBS #53 - Accounting and Financial Reporting for Derivative Instruments:

The key provision of this statement is that derivative instruments, with the exception of syntheticguaranteed investment contracts, are reported at fair value. Issued June 2008 and effective for financialstatement periods beginning after June 15, 2009. The table below describes how changes in the fair valueof derivative instruments are reported:

Purpose of Derivative Instrument

Investment Hedging

Reporting of change in the fair value of thederivative instrument

InvestmentRevenue-Loss

Deferred Charge or Credit

Reported in:Statement of

ActivitiesStatement of Net Assets-

Balance Sheet

A. GASBS #53 limits the use of the deferred recognition approach to those it describes as effectivehedges. In essence, a hedge is considered effective when a change in the fair value of the hedgingderivative is offset by the change in the fair value of the underlying hedged item. The standardprovides three methods to evaluate the effectiveness of a hedge:

1. Consistent Critical Terms Method -- If the critical terms of the hedgeable item and thederivative instrument are the same, or very similar, the changes in cash flows or fair valuesof the derivative instrument will substantially offset the changes in the cash flows or fairvalues of the hedgeable item.

2. Quantitative Methods --

a. Dollar-offset method -- This method evaluates effectiveness by comparing theexpected cash flows or fair values of the derivative instrument with the changes in theexpected cash flows or fair values of the hedgeable item. If the changes of either thehedgeable item or the derivative instrument divided by the other falls in the range of80 to 125 percent, these changes substantially offset and the derivative instrument is


31 of 43 3/22/2012 2:33 PM

considered to be an effective hedge. For example, if the actual results are such thatthe change in fair value of the derivative instrument is a decrease of $100 and the fairvalue of the hedgeable item increased by 110, the dollar-offset percentage is 110/100,which is 110 percent, or 100/110, which is 91 percent. In either case, the hedgingderivative instrument is determined to be effective.

b. Regression analysis method -- This method evaluates effectiveness byconsidering the statistical relationship between the cash flows or fair values of thederivative instrument and the hedgeable item. The changes in cash flows or fair valuesof the derivative instrument substantially offset the changes in the cash flows or fairvalue of the hedgeable item, if all of the following criteria are met:

i. The R-squared of the regression analysis is at least 0.80;

ii. The F-statistic calculated for the regression model demonstrates that the modelis significant using a 95 percent confidence level;

iii. The regression coefficient for the slope is between -1.25 and - 0.80.

3. Synthetic Instrument Method -- Sometimes, a government will combine an interest-bearing hedgeable item with a derivative instrument to create a third synthetic instrument.This method is limited to cash flow hedges in which the hedgeable items are interest bearingand carry a variable rate. Under this method, the derivative instrument is effective if theactual synthetic rate is substantially fixed. The hedge is considered substantially fixed if theactual synthetic rate is within 90 percent to 111 percent of the fixed rate. For example, if aninterest-rate swap's fixed payment rate is 7.00 percent, an actual synthetic instrument ratethat falls within a range between 6.30 percent (90 percent of 7.00 percent) and 7.77 percent(111 percent of 7.00 percent) is considered to be substantially fixed and, therefore, thederivative instrument is considered effective.

B. Changes in the fair value of derivative instruments, that do not qualify as effective using one themethods described above, are reported in the Statement of Activities.

VII. GASBS # 55 - The Hierarchy of Generally Accepted Accounting Principles for State and LocalGovernments

A. The purpose of Statement No. 55 is to move the relevant parts of the AICPA Statement on AuditingStandards No. 69, "The Meaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples," to the GASB codification. Issued and effective March 2009. The GAAP hierarchy for allstate and local governmental entities is categorized in descending order of authority as follows:

1. Officially established accounting principles - Governmental Accounting Standards Board(GASB) Statements and Interpretations.

2. GASB Technical Bulletins and, if specifically made applicable to state and local entities by theAICPA and cleared by GASB, AICPA Industry Audit and Accounting Guides, and AICPAStatements of Position.

3. AICPA Practice Bulletins, if specifically made applicable to state and local entities and clearedby GASB, as well as consensus positions of a group of accountants organized by GASB thatattempt to reach consensus positions on accounting issues applicable to state and localgovernmental entities.


32 of 43 3/22/2012 2:33 PM

4. Implementation guides (Q&As) published by the GASB staff, as well as practices that arewidely recognized in state and local government. If the accounting treatment for atransaction or other event is not specified by a pronouncement or established practicedescribed in categories (a)-(d), a governmental entity may consider other accountingliterature. Other accounting literature includes: GASB Concept Statements, pronouncementsreferred to in categories (a)-(d) not specifically made application by GASB, and otherpronouncements issued by FASB, FASAB, AICPA, IPSAB, and accounting textbooks,handbooks, and articles.

VIII. GASBS # 56 - Codification of Accounting and Financial Reporting Guidance Contained in theAICPA Statements on Auditing Standards

Issued and effective March 2009.

A. This Statement adds accounting guidance in the AICPA auditing literature to the GASB codification inthree areas:

1. Related Party Transactions -- State and local governments are required to discloserelated party transactions and should recognize the substance of the transaction rather thanits legal form.

2. Subsequent Events -- Two types of subsequent events are described in the Statement.Recognized events consist of events that provide additional evidence with respect toconditions that existed at the date of the statement of net assets and require adjustments tothe financial statements. Nonrecognized events consist of those events that provide evidencewith respect to conditions that did not exist at the date of the statement of net assets. Theseevents should not result in adjustment of the financial statements, but they may be disclosedin the notes of the financial statements.

3. Going Concern Considerations -- The Statement requires financial statement preparersto evaluate whether there is a substantial doubt about a government's ability to continue as agoing concern for 12 months beyond the financial statement date (or shortly thereafter,which GASB describes as "an additional three months"). Indicators of substantial doubtinclude:

a. Negative trends (e.g., recurring budget deficits);

b. Other indicators of financial difficulties (e.g., loan default);

c. Internal matters (e.g., work stoppages);

d. External matters (e.g., legal proceedings).

4. If the evaluation determines that there is substantial doubt about a governmental entity'sability to continue as a going concern, then the notes to the financial statements shouldinclude the following disclosures:

a. Pertinent conditions and events giving rise to the assessment that a substantial doubtexists about the ability of the entity to continue as a going concern;

b. The possible effects of such conditions and events;

c. Government officials' evaluation of the significance of those conditions and events;

d. Possible discontinuance of operations;

e. Government officials' plans;


33 of 43 3/22/2012 2:33 PM

f. Information about the recoverability or classification of recorded assets amounts orthe amounts or classification of liabilities.

IX. GASB Concept Statement No. 5 - Service Efforts and Accomplishments Reporting

An Amendment of GASB Concepts Statement No. 2.

A. Service Efforts and Accomplishments (SEA) -- Issued November 2008.

1. CS-5 amends CS-2 by stating that SEA reporting is voluntary and that it will provideguidelines (i.e., suggestions) only. Essentially CS-5 states that it is beyond the scope of theGASB to mandate SEA reporting practices. Instead, GASB provides conceptual guidanceregarding the reporting of SEA performance information. CS-5 identifies the following threeelements of SEA performance measures:

a. Measures of service efforts - input measures (e.g., number of work hours devoted toroad maintenance);

b. Measures of service accomplishments - output and outcome measures (number ofmiles of road repaired);

c. Measures that relate service efforts to service accomplishments - efficiency measuresand cost-outcome measures (labor cost per mile of road resurfaced).

2. CS-5 also identifies related information that provides a context for understanding SEAperformance measures. Related quantitative and narrative information that can help providea context for users to understand reported SEA performance measures fall into the followingfive categories:

a. Comparison information - to previous years, to established targets, progress towardgoals, to generally accepted norms and standards, to comparable entities andjurisdictions;

b. Unintended effects - significant indirect consequences (positive or negative);

c. Demand for services - changes in the demand for services and effect of otherprograms competing for the same resources;

d. Factors that influence results - external and internal factors that affect results;

e. Narrative information - explanations for the level of SEA performance, unintendedeffects, actions taken.


34 of 43 3/22/2012 2:33 PM

FlashcardsFlashcard #1 (FC6396)

During what stage of the internally generated softwaredevelopment process are costs capitalized?

Application development stage.


List the three stages for internally generated softwaredevelopment. Preliminary project stage;1.

Application development stage;2.Post-implementation/operation stage.3.


Define "probability-weighted procedure". The approach used to calculate the liability for cleancosts associated with a pollution remediation effort.


When are pollution remediation obligations recognizedfor government reporting?

When the government knows that a site is polluted andone of the five obligating events has occurred.


True or False: Pension plan benefits paid are calleddeductions in the pension plan financial statements.



True or False: Contributions to pension plans are calledrevenues in the Pension Plan financial statements.

False. They are called "Additions" in the Pension Planfinancial statements (they are not called revenues).


List the two financial statements required for definedpension benefit plans in government reporting. Statement of Plan Net Assets;1.

Statement of Changes in Plan Net Assets.2.


35 of 43 3/22/2012 2:33 PM

Proficiency Questions


According to GASB #50, governmental entities that offer Other Postemployment Benefits to theirretirees must disclose information about the funding status of these plans.

True

False


Macon City offers health insurance to its retirees as an Other Postemployment Benefit but funds theplan on a pay-as-you-go basis. The actuarial required contribution (ARC) for the plan for the currentyear is $800,000; however, Macon City plans to pay only the $300,000 required to cover the plan'scost in the current period. If all of Macon City's covered employees were paid out of GovernmentalFund resources, Macon City should recognize $300,000 as an Expenditure in the current period.

True

False


Marble City's Utility Fund (an Enterprise Fund) recently acquired 10 acres of land which it plans touse to expand its sewage processing capacity. A portion of the land that was previously used as adumping ground is polluted. The City estimates that it will cost approximately $400,000 to clean upthe site. Upon purchase of the land and determination of the cleanup costs, Marble City shouldrecognize pollution remediation expenses of $400,000 and record a corresponding liability.

True

False


Taylor County was recently named in a lawsuit that seeks to recover $500,000 in pollutionremediation costs related to drainage problems on the County's right of ways. The County attorneysfeel that it is likely that the County will lose the lawsuit and have to cover the full amount of thesecosts. The County must report a $500,000 expense related to these costs in its current periodGovernment-wide Financial Statements.

True

False


Disclosures about the actuarial methods and significant assumptions used to determine both pensioncost and other postemployment benefit costs are presented in the Required SupplementaryInformation section of the CAFR.

True

False


36 of 43 3/22/2012 2:33 PM


In the Government-wide Statements, both Governmental-Activities and Business-type Activitiesreport other postemployment benefits at their actuarially determined cost for the period.

True

False


The actuarially determined other postemployment benefit or obligation is disclosed in the Schedule ofFunding Progress, which is included in the Notes to the Financial Statements.

True

False


A tornado recently destroyed the Wall City Civic Auditorium, resulting in a loss of $450,000, althoughthe City was able to recover $300,000 of the loss through insurance proceeds. Wall City shouldreport the $450,000 loss as an extraordinary item on its Statement of Activities.

True

False


The Garden City Foundation is a legally separate nonprofit organization established to provideresources to improve and maintain the landscaping around public buildings in Garden City. TheFoundation's resources are used only for this purpose and provide for substantial improvement in theappearance of the buildings, although the actual dollar value of the assistance is insignificant to theCity. The Garden City Foundation should be included in Garden City's financial statements as acomponent unit.

True

False


Which of the following is not one of the five information classification sections that must be includedin the Statistical Section of the CAFR?

A. Operating Information

B. Demographics Information

C. Revenue Capacity Information

D. Fund Balance Information


37 of 43 3/22/2012 2:33 PM

Past Exam Questions

Question #1 (1. AICPA.083782FAR-SIM)

In January 2010, Red County acquired the right to draw water from a lake on the property of aprivately owned ranch in exchange for a cash payment of $20 million. The annual volume of waterthat can be drawn is unlimited. The county's rights under the contract expire in 10 years (2020);however, the contact provides the opportunity to renew the water rights for an additional 10 years(to 2030) for no additional payment, subject to the mutual agreement of the two parties. The countybelieves that it will request the renewal. The county expects the other party to agree to the renewalsince the ranch is a significant user of the county's water supply and is a major employer of RedCounty residents. The county operates on a calendar fiscal year. The county should recognize in its2010 Government-Wide Financial Statements:

A. $20 million expense in its Statement of Activities.

B. $10 million expense in its Statement of Activities.

C. $2 million amortization expense in its Statement of Activities.

D. $1 million amortization expense in its Statement of Activities.


In January 2010, Blue County acquired the right to draw water from a lake on the property of aprivately owned ranch in exchange for a cash payment of $20 million. The annual volume of waterthat can be drawn is unlimited. The county's rights under the contract expire in 10 years; however,the contact provides the opportunity to renew the water rights for an additional 10 years for anadditional payment of $10 million, if the county chooses . The county believes that it will request therenewal. The county expects the other party to agree to the renewal since the ranch is a significantuser of the county's water supply and is a major employer of Blue County residents. The countyoperates on a calendar fiscal year. The county should recognize in its 2010 Government-WideFinancial Statements:

A. $20 million in its Statement of Activities.

B. $2 million in its Statement of Activities.

C. $1.5 million in its Statement of Activities.

D. $30 million in its Statement of Activities.


Small County's tax assessment department identified the need for new property tax assessment andbilling software. A project task force composed of county staff was assembled to address this need.The following outlays were incurred related to the project in 2015:

Task force interviews with operators of the software and users of the information to determinethe needs of the users, evaluation of system hardware requirements, assessment of currentin-house information technology resources and evaluation of commercially available softwarepackages, and issuing requests for proposals from vendors. Outlays: $1.5 million.The county awards a contract in the amount of $14.5 million to a vendor to acquire a perpetuallicense to use its property tax software as modified to meet the County's needs. The vendor isresponsible for the installation and modification of the software, while four county employeesare dedicated to the project full time until its completion at an additional cost of $0.5 million.Outlays for data entry and for training software users and operators is $0.6 million.

How much should Small County capitalize related to the outlays associated to the project?

A. $15.6 million


38 of 43 3/22/2012 2:33 PM

B. $14.5 million

C. $15 million

D. $16.5 million


A government has an investment derivative instrument that is considered effective. The fair value ofthis derivative instrument has increased by $100,000 in the current period. The change in fair valueshould be reported as:

A. Investment Revenue in the Statement of Activities.

B. Deferred Credit in the Statement of Net Assets.

C. Holding Gain in Fund Balance.

D. Should not be reported.


Which of the following is not one of the five information classification sections that must be includedin the Statistical Section of the CAFR?

A. Operating information.

B. Demographics information.

C. Revenue Capacity information.

D. Fund Balance information.


39 of 43 3/22/2012 2:33 PM

Proficiency Question Answers

Question #1 : True

Question #2 : True

Question #3 : False

Question #4 : True

Question #5 : False

Question #6 : True

Question #7 : False

Question #8 : False

Question #9 : False

Question #10 : D


40 of 43 3/22/2012 2:33 PM

Past Exam Question Answers


A. The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20 million for theacquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county'sCapital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Since there is evidence thatthe county will seek and be able to acquire renewal of the water rights without incurring additional outlays, the usefullife of the water rights is 20 years-the original 10 year term plus the 10 year renewal term. Using straight-lineamortization, annual amortization expense of $1 million ($20 million over 20 years) would be recorded in thecounty's Government-Wide Statement of Activities, starting in 2010.

B. The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20 million for theacquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county'sCapital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Since there is evidence thatthe county will seek and be able to acquire renewal of the water rights without incurring additional outlays, the usefullife of the water rights is 20 years-the original 10 year term plus the 10 year renewal term. Using straight-lineamortization, annual amortization expense of $1 million ($20 million over 20 years) would be recorded in thecounty's Government-Wide Statement of Activities, starting in 2010.

C. The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20 million for theacquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county'sCapital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Since there is evidence thatthe county will seek and be able to acquire renewal of the water rights without incurring additional outlays, the usefullife of the water rights is 20 years-the original 10 year term plus the 10 year renewal term. Using straight-lineamortization, annual amortization expense of $1 million ($20 million over 20 years) would be recorded in thecounty's Government-Wide Statement of Activities, starting in 2010.

D. (Correct!) The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20million for the acquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded inthe county's Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Since there isevidence that the county will seek and be able to acquire renewal of the water rights without incurring additionaloutlays, the useful life of the water rights is 20 years-the original 10 year term plus the 10 year renewal term. Usingstraight-line amortization, annual amortization expense of $1 million ($20 million over 20 years) would be recordedin the county's Government-Wide Statement of Activities, starting in 2010.


A. The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20 million for theacquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county'sCapital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Because the county would berequired to make an additional payment to execute the 10-year renewal period, this period is not considered as partof the useful life acquired in exchange for the $20 million payment. The useful life of the water rights is 10 years.Using straight-line amortization, annual amortization expense of $2 million ($20 million over 10 years) would berecorded in the county's Government-Wide Statement of Activities starting in 2010.

B. (Correct!) The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20million for the acquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded inthe county's Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Because thecounty would be required to make an additional payment to execute the 10-year renewal period, this period is notconsidered as part of the useful life acquired in exchange for the $20 million payment. The useful life of the waterrights is 10 years. Using straight-line amortization, annual amortization expense of $2 million ($20 million over 10years) would be recorded in the county's Government-Wide Statement of Activities starting in 2010.

C. The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20 million for theacquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county'sCapital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Because the county would berequired to make an additional payment to execute the 10-year renewal period, this period is not considered as partof the useful life acquired in exchange for the $20 million payment. The useful life of the water rights is 10 years.Using straight-line amortization, annual amortization expense of $2 million ($20 million over 10 years) would berecorded in the county's Government-Wide Statement of Activities starting in 2010.

D. The county would recognize in its Government-Wide Statement of Net Assets a capital asset of $20 million for theacquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county'sCapital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Assets. Because the county would berequired to make an additional payment to execute the 10-year renewal period, this period is not considered as part


41 of 43 3/22/2012 2:33 PM

of the useful life acquired in exchange for the $20 million payment. The useful life of the water rights is 10 years.Using straight-line amortization, annual amortization expense of $2 million ($20 million over 10 years) would berecorded in the county's Government-Wide Statement of Activities starting in 2010.


A. According to GASB Statement No. 51, the activities involved in developing and installing internally generatedcomputer software can be grouped into the following three stages: (1) preliminary project stage, (2) applicationdevelopment stage, and (3) post-implementation/operation stage. Costs in the first and last stage are expensed asincurred. Costs related to the application development stage are capitalized in the Government-Wide FinancialStatements. The $1.5 million spent to conduct interviews and evaluate various software programs is consider stage1-preliminary project stage-and should be expensed as incurred. The $0.60 million in data entry and training ispost-implementation/operation stage and should also be expensed as incurred. Both the $14.5 million outlay forcommercial software and the $0.50 million for installation and testing of the software relate to the second stage-application and development-and should be capitalized ($15.0 million).

B. According to GASB Statement No. 51, the activities involved in developing and installing internally generatedcomputer software can be grouped into the following three stages: (1) preliminary project stage, (2) applicationdevelopment stage, and (3) post-implementation/operation stage. Costs in the first and last stage are expensed asincurred. Costs related to the application development stage are capitalized in the Government-Wide FinancialStatements. The $1.5 million spent to conduct interviews and evaluate various software programs is consider stage1-preliminary project stage-and should be expensed as incurred. The $0.60 million in data entry and training ispost-implementation/operation stage and should also be expensed as incurred. Both the $14.5 million outlay forcommercial software and the $0.50 million for installation and testing of the software relate to the second stage-application and development-and should be capitalized ($15.0 million).

C. (Correct!) According to GASB Statement No. 51, the activities involved in developing and installing internallygenerated computer software can be grouped into the following three stages: (1) preliminary project stage, (2)application development stage, and (3) post-implementation/operation stage. Costs in the first and last stage areexpensed as incurred. Costs related to the application development stage are capitalized in the Government-WideFinancial Statements. The $1.5 million spent to conduct interviews and evaluate various software programs isconsider stage 1-preliminary project stage-and should be expensed as incurred. The $0.60 million in data entry andtraining is post-implementation/operation stage and should also be expensed as incurred. Both the $14.5 millionoutlay for commercial software and the $0.50 million for installation and testing of the software relate to the secondstage-application and development-and should be capitalized ($15.0 million).

D. According to GASB Statement No. 51, the activities involved in developing and installing internally generatedcomputer software can be grouped into the following three stages: (1) preliminary project stage, (2) applicationdevelopment stage, and (3) post-implementation/operation stage. Costs in the first and last stage are expensed asincurred. Costs related to the application development stage are capitalized in the Government-Wide FinancialStatements. The $1.5 million spent to conduct interviews and evaluate various software programs is consider stage1-preliminary project stage-and should be expensed as incurred. The $0.60 million in data entry and training ispost-implementation/operation stage and should also be expensed as incurred. Both the $14.5 million outlay forcommercial software and the $0.50 million for installation and testing of the software relate to the second stage-application and development-and should be capitalized ($15.0 million).


A. (Correct!) GASB Statement No. 53 requires changes in the fair value of Derivative Instruments used forinvestment purposes to be reported within the Investment Income classification of the Statement of Activities.Changes in the fair value of Hedging Derivative Instruments are reported as Deferrals in the Statement of NetAssets.

B. The purpose of the Derivative Instrument is for investment, rather than hedging of risk. GASB Statement No. 53requires changes in the fair value of Derivative Instruments used for investment purposes to be reported within theInvestment Income classification of the Statement of Activities. Changes in the fair value of Hedging DerivativeInstruments are reported as Deferrals in the Statement of Net Assets.

C. GASB Statement No. 53 requires changes in the fair value of Derivative Instruments used for investment purposesto be reported within the Investment Income classification of the Statement of Activities (answer A is correct).Changes in the fair value of Hedging Derivative Instruments are reported as Deferrals in the Statement of Net Assets(note: answer B would be correct if the question was about changes in the fair value of Hedging DerivativeInstruments).

D. GASB Statement No. 53 requires changes in the fair value of Derivative Instruments used for investment purposesto be reported within the Investment Income classification of the Statement of Activities (answer A is correct).Changes in the fair value of Hedging Derivative Instruments are reported as Deferrals in the Statement of Net Assets


42 of 43 3/22/2012 2:33 PM

(note: answer B would be correct if the question was about changes in the fair value of Hedging DerivativeInstruments).


A. GASB Statement No. 44 requires that statistical information be presented in five categories - Financial TrendsInformation, Revenue Capacity Information, Debt Capacity Information, Demographic and Economic Information,and Operating Information. Fund balance information is not one of the five categories, but for Governmental Funds,Fund Balance Information is required as part of the financial trends information category.

B. GASB Statement No. 44 requires that statistical information be presented in Financial Trends Information,Revenue Capacity Information, Debt Capacity Information, Demographic and Economic Information, and OperatingInformation. Fund balance information is not one of the five categories, but for Governmental Funds, Fund BalanceInformation is required as part of the financial trends information category.

C. GASB Statement No. 44 requires that statistical information be presented in five categories - Financial TrendsInformation, Revenue Capacity Information, Debt Capacity Information, Demographic and Economic Information,and Operating Information. Fund balance information is not one of the five categories, but for Governmental Funds,Fund Balance Information is required as part of the financial trends information category.

D. (Correct!) GASB Statement No. 44 requires that statistical information be presented in five categories - FinancialTrends Information, Revenue Capacity Information, Debt Capacity Information, Demographic and EconomicInformation, and Operating Information. Fund balance information is not one of the five categories, but forGovernmental Funds, Fund Balance Information is required as part of the financial trends information category.


43 of 43 3/22/2012 2:33 PM

#13

Documents

real estate

formatassignmentamp

subsidiary

full accrual

information

debt capacity

grand total

modified accrual