July 2002 1 Introduction to Internal Service Funds
Mar 31, 2015
July 2002 1
Introduction to Internal Service
Funds
July 2002 2
Internal Service Funds (ISFs)
Instructions for this power point presentation. This button appears
throughout the presentation. Click to obtain additional data.
Clicking on underlined text will provide links to additional information.
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ISFs . . . continued
Established to avoid duplication of effort. Bill clients for service. Are self supporting. Provide services more conveniently or at
a lower cost.
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ISFs . . . continued
Reflect major capital items as assets. Record depreciation to determine all
costs of operating the activity. Measure the full cost of the goods or
services. Operate as a business.
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Journal Entries
Various journal entries record the establishment and operational activities of an Internal Service Fund.
See slides 6 through 9 for these journal entries.
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Journal Entries . . . continued
Establish an equity transfer: Debit: Cash
Credit: Contributed capital from General
Fund
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Journal Entries . . . continued
Acquisition of IT equipment Debit: IT equipment
Credit: Cash Supplies for the operation
Debit: Computer supplies expense Credit: Cash
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Journal Entries . . . continued
Billings for services rendered Debit: Due from State department
Credit: Revenues Payment of billings
Debit: Cash Credit: Due from State department
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Journal Entries . . . continued
Depreciation Debit: Depreciation expense
Credit: Accumulated depreciation
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End of the Year Internal Service Funds prepare various
financial statements: Trial Balance Closing Entries Balance Sheet Revenue and Expense Statement Cash Flow Statement
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Internal Service Funds (ISFs)
From here on, this presentation is on the State of California’s Internal Service Funds.
How does California establish an Internal Service Fund?
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Establishing ISFs
First, an Internal Service Fund is: Created Classified
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ISFs Created
Legislation
Administratively (Government Code Section 13306)
Electorate Initiative
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ISFs Classified Funding source/appropriation to
finance program activities must: Identify the resources. Specify the legal authority to
expend.
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ISFs Classified . . . continued Fund Codes
Alphabetical Numerical Fund structure Generally Accepted Accounting
Principles (GAAP) Legal basis
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Uniform Codes Manual (UCM)
Provides the source for coding the ISF. Provides a uniform coding system. Provides a chart of accounts for
budgetary, accounting, and reporting purposes.
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UCM . . . continued
Comprehensive listing of Accounts Funds Objects of expenditures Receipts
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In California, Internal Service Funds
are used to:
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Internal Service Funds (ISFs)
Account for State of California activities, which provide: Goods and services to other State
departments. Reimbursement of costs.
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ISFs . . . continued
California has established over 20 ISFs. Not all of these ISFs are active. See slides 21 through 27 for some
examples of California’s ISFs.
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Examples of Internal Service Funds (ISFs) . . . continued Water Resources Revolving Fund
Accounts for charges for administrative services related to water delivery provided by the Department of Water Resources to federal, State, and local entities.
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Examples of ISFs . . . continued
Equipment Service Fund Accounts for the purchase,
maintenance, and administrative costs of equipment used by the Department of Transportation.
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Examples of ISFs . . . continued
Service Revolving Fund Accounts for printing and
procurement charges for services rendered by the Department of General Services for State departments and other public entities.
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Examples of ISFs . . . continued
Stephen P. Teale Data Center Revolving Fund (TDC) Accounts for charges of IT services
performed for various State departments by the TDC.
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Examples of ISFs . . . continued
Prison Industries Revolving Fund Accounts for charges for goods
produced by inmates in State prisons that are sold to State departments and other entities.
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Examples of ISFs . . . continued
Health and Human Services Agency Data Center Revolving Fund (HHSDC) Accounts for charges of IT services
performed for various State departments by the HHSDC.
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Examples of ISFs . . . continued
Other Internal Service Funds Account for all other goods or
services provided to other agencys, departments, or governments on a cost reimbursement basis.
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Examples of ISFs . . . continued
Let’s look more closely at the Health and Human Services Agency Data Center (HHSADC), an Internal Service Fund.
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Health and Human Services Agency Data Center (HHSADC) Created in 1972. Provides centralized IT services for
State departments. Centralizes IT at reduced costs. Eliminates of duplication of work. Ensures optimum capacity.
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HHSADC . . . continued Self supporting. No General Fund appropriation. Costs recovered through user charges. User charges set at the beginning of each
fiscal year. Goal is to break even. Uneven demand for services makes it
difficult to predict billing rates. Shortages or surpluses often occur.
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HHSADC . . . continued
Uses a standard costing system. Costs are categorized under separate
group or cost pools related to an activity. Cost centers represent a billable service. Expenses are assigned a cost center. Expenses are totaled at the end of year
to determine the cost for each service.
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HHSADC . . . continued Example of some cost centers at HHSADC :
Cost center
number
Description Costs captured Measurement unit to allocate costs to clients
001 Mainframe All CPU costs Per CPU hour
038 Printing Services
All print support costs Per line printed
060 Internet Service
Internet provider cost Per Internet user
300 Disk Storage Disk storage costs Per track stored
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HHSADC. . . continued
Each cost center has a billing rate:
Projected Annual Cost
Billing Rate = ----------------------- Projected
Annual Usage
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HHSADC . . . continued
Utility system records the usage for each client. Calculates a bill based on actual usage of each services.
Monthly an invoice is sent to the client listing service usage multiplied by the billing rate.
Client pays invoice.
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HHSADC . . . continued
Analysis of Costs Quarterly review of rates. Annual adjustments. Invoice adjustment for refunds. Financing impacts rates charged to
clients. Click on button to see types of
financing.
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HHSADC . . . continued
Clients receiving federal funds bill the federal government for these charges.
Over/under collections result in over/under billings to the federal government.
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HHSADC . . . continued
Why should anyone care if the federal government is over or under charged?
Or any other fund, State department, entity?
Let’s look at some items for background to this issue.
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Cost Plans Statewide Cost Allocation Plan
(SWCAP) recovers central service costs from federal funds.
SWCAP plan has two sections.
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Cost Plans . . . continued Both Section I and Section II of the
SWCAP follow the regulations and guidelines of . . . Office of Management and Budget,
Federal Circular A-87 “Cost Principles for State and Local Governments”.
Department of Health and Human Services guideline ASMB C-10.
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Cost Plans . . . continued
SWCAP Section I is the allocated central service costs distributed to State departments.
State departments transfer SWCAP recoveries to the General Fund from reimbursements received from the federal government.
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Cost Plans . . . continued
SWCAP Section II includes data for each ISF with an operating budget over $5 million, including: Rates Billings Policies Refunds
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Cost Plans . . . continued
SWCAP Section II Costs for operating the ISF are
included in billings by the State department (indirect cost rate proposals, cost allocation plans) to the federal government.
Yearly, the federal government reviews these ISFs.
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Cost Plans . . . continued For each ISF, SWCAP Section II includes:
Description of Service Balance Sheet Revenue and Expense Statement Cost recovery and billing methodology Cost center billing rates Other information
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State Requirements State’s requirements are:
Full Cost Recovery Government Code 11010
Government Code specific to an ISF HHSDC Fund Balance billing rate
Government Code 11755 State Administrative Manual Rates reviewed by audit groups
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Federal requirements are: Rates reviewed annually. Allowable A-87 retained earnings. Include only reasonable costs as
defined in A-87 and ASMB C-10.
Federal Requirements
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Federal Requirements . . . continued After issuance of the Comprehensive
Annual Financial Report (CAFR) each ISF in the SWCAP prepares a Reconciliation of Retained Earnings Balance to Federal Guidelines .
SCO website for CAFR:
California Comprehensive Annual Financial Report
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Federal Requirements . . . continued Retained earning reconciliation
determines the excess retained earnings. A portion is owed to the federal government, based upon the federal financial participation of the clients.
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State and Federal Differences
State and federal government differ on the calculation of working capital.
Differences are shown on the next slides.
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State and Federal Differences. . . continued Working Capital 2001-02 State of California Federal government
Definition
Current Assets
minus Current
Liabilities
60 days worth of cash expenses, a portion of retained earnings
that functions as a reserve
Authority FASB and AICPA OMB Circular A-87
Complies with GAAP Yes No
Excess RE balance $0 $0
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Other Differences
Different statements Governmental funds
Only current assets and current liabilities are accounted and reported.
ISF funds All assets and liabilities are
accounted and reported.
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Other Differences . . . continued Governmental funds
Modified accrual basis Expenditures No gain or loss Spending
ISFs funds Full accrual Expenses Gain or loss recognized Income determination
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State’s Working Capital
Defined in Accounting Research Bulletin No. 43 issued by the AICPA.
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Federal Working Capital Calculation Total Expenses per audited financial
statements. Less Non-cash expenses such as
depreciation. Equals total cash expenses for year. Calculation continued on next slide.
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Federal Working Capital Calculation . . . continued Divide by 360 days equals total average
cash expenses per day. Multiply by 60 equals 60 days worth of
cash expenses. Deduct from retained earnings to
arrive at the excess level of retained earnings.
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Working Capital Impact Comparison State and federal working capital
comparison is shown in the following spreadsheet. Re.xls
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State Controller’s Office Reports SCO presents financial data on activities
similar to the private sector. Per GASB (Governmental Accounting
Standards Board) statement number 20, the State applies all applicable GASB and FASB (Financial Accounting Standards Board) pronouncements issued on or before November 30, 1989, with one exception.
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Exception
Prison Industry Authority, an ISF, follows FASB pronouncements issued after November 30, 1989, unless they conflict with or contradict GASB pronouncements.
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Auditors review of ISFs Some points auditors look at when
reviewing ISFs: Users billed at the same rate for the
same service. Identification of outside users, such
as other governmental entities (local governments).
Treatment of past profit/loss.
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Auditor’s review of ISFs. . . continued Some points auditors look at when
reviewing ISFs: . . . continued Procedures followed for billings that
exceed original amounts. Review of rate base to determine
equal distribution of costs for services.
In the future, selectively reviewed.
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Reconciling Budgetary Basis with Generally Accepted Accounting Principles (GAAP)
Perspective difference Fund classification
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Reconciling Budgetary Basis with GAAP . . . continued Perspective difference - continued
State basis Governmental
General Fund and other governmental cost fund.
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Reconciling Budgetary Basis with GAAP . . . continued Perspective difference . . . continued State basis
Non-governmental Not subject to annual appropriation Monies other than General Fund
and special taxes, fees, etc.
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Reconciling Budgetary Basis with GAAP . . . continued Perspective difference . . . continued GAAP
Classified as governmental, proprietary, or fiduciary funds.
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Reconciling Budgetary Basis with GAAP . . . continued
Basis difference Advances and Loans
Budgetary basis -- recorded as expenditures
GAAP -- recorded as assets
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Reconciling Budgetary Basis with GAAP . . . continued Basis difference . . . continued
Encumbrances Budgetary basis -- not recorded GAAP -- recorded
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Reconciling Budgetary Basis with GAAP . . . continued Basis difference . . . continued
Contributed capital Budgetary basis -- not recorded GAAP -- recorded
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Additional Information http://www.dof.ca.gov/fisa/fisa.htm
Provides information or links to a variety of items: UCM CALSTARS Budgets Pro Rata and SWCAP State Administrative Manual Federal websites
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Establish Funds Administratively Necessary to . . .
Properly manage the State’s assets Account for the financial activities Deposit resources of the State
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Establish Funds Administratively . . . continued
Comply with legal requirements “Generally Accepted Accounting
Principles” Effective financial administration
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Financing ISF must find ways to buy new
equipment or other assets. How?
General Fund appropriations Capital contributions Debt financing
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