Proprietary Funds- Reporting Requirements for Annual Financial Reports (2022)

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Financial statements used to present proprietary funds:

  • Statement of net position
  • Statement of revenues, expenses and changes in net position
  • Statement of cash flows

Present fund financial statements for proprietary funds using the economic resources measurement focus and the full accrual basis of accounting. For hard-copy AFRs, agencies present individual proprietary funds in separate columns, whereas universities must aggregate funds into a single column. Display a combined total column for all enterprise funds.

GASB 34 requires the following format presentation on the fund financial statements for proprietary funds:

  • Capital contributions, additions to permanent and term endowments, special and extraordinary items and transfers are reported above the increase (decrease) in net position.
  • Present special and extraordinary items separately at the bottom of the statement. For more information, see Governmental Funds.

Present the statement of cash flows for proprietary funds using the direct method of cash flows from operating activities. The statement must include a reconciliation of operating cash flows to operating income. For more information on the statement of cash flows, see Statement of Cash Flows and Instructions for the SOCF Web Application.

The proprietary fund category includes enterprise and internal service funds. Proprietary fund reporting focuses on:

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  • Determination of operating income
  • Changes in net position (or cost recovery)
  • Financial position
  • Cash flows

Accrual accounting attempts to record a transaction’s financial effects in the period that the transaction occurred — rather than when the cash was received or paid by the agency. Revenues are recorded when earned or when the agency has a right to receive the revenues. Expenses are recognized when incurred. The date related cash was received or paid is of no consequence.

Four essential elements of accrual accounting:

  • Recognition of expenditures when incurred and the subsequent amortization of the deferred outflows
  • Recognition of revenues when earned
  • Capitalization of certain expenses and the subsequent depreciation of the capitalized costs
  • Accruals of revenues earned and expenses incurred
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Measurement Focus for Proprietary Funds [+]

Proprietary funds use the flow of economic resources measurement focus — a focus similar to that used by commercial entities. Proprietary funds focus on whether the enterprise is economically better off as a result of the events and transactions that occurred during the fiscal period reported.

Report transactions and events that:

  • Improved an enterprise’s financial position — reported as revenues or gains
  • Diminished the economic position of the enterprise — reported as expenses or losses

Present both current and long-term assets and liabilities on the statement of net position for proprietary funds.

Operating vs. Non-Operating Revenues/Expenses [+]

The proprietary statement of revenues, expenses and changes in net position is segregated into operating and non-operating sections.

Generally, operating activities are those that are either:

  • The direct result from the provision of goods and services to customers
    –OR–
  • Directly related to the principal and usual activity of a fund

GASB 34 does not specifically provide a definition of operating revenues and expenditures. However, according to GASB 34, paragraph 102, when defining a proprietary fund’s operating revenues and expenditures, for consistency purposes, agencies should consider how individual transactions are classified on the statement of cash flows. For more information, refer to GASB 9.

Reporting of Loan Activities

Loan activities are generally classified as investing activities.

Exception to the general rule: Certain loan programs (such as low-income housing and student loan programs) are not intended to be investments, but are undertaken instead to fulfill a governmental responsibility and directly provide a benefit to individual constituents. According to GASB 9, paragraph 19, these “program loans” are classified as operating activities on the statement of cash flows. Therefore, it is appropriate for the agency to report transactions related to these program loans as part of their operating activities section on the statement of revenues, expenses and changes in net position.

Note: GASB expects few types of loan programs or finance authorities to meet the spirit of the exception.

Reporting of Grants

Generally, grants are treated as subsidies and are therefore categorized as either:

  • Capital and related financing activities
    –OR–
  • Noncapital financing activities

However, GASB recognizes that certain arrangements called “grants” are essentially the same as contracts for services. In order for a “grant” to be considered a contract for service, the grant would have to finance a program that the agency would not otherwise undertake. Therefore, the grant is not subsidizing an existing program but rather reimbursing the costs of a new program whose activity is inherently part of the operations of the grantor.

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Enterprise Funds (Fund Type 05) [+]

Use enterprise funds to report any activity for which a fee is charged to external users (for example, citizens) for goods and services. Agencies must report activities in enterprise funds (FT05) if any one of the following criteria is met. Review the activity’s principal revenue sources in applying the criteria.

  • The activity is financed with debt secured solely by a pledge of the net revenues from fees and charges of the activity. This debt and the full faith and credit of a related primary government or component unit (even if they are not expected to make any payments) is not payable solely from fees and charges of the activity. (Some debt may be secured, in part, by a portion of its own proceeds but should be considered as payable “solely” from the revenues of the activity.)
  • Laws or regulations require the activity’s costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues.
  • The pricing policies of the activity establish the fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service).

These criteria do not require insignificant activities of agencies to be reported as enterprise funds (FT05). For example, state law may require a county’s small claims court to assess plaintiffs a fee to cover the cost of frivolous claims. But taxes (not fees) are the principal revenue source of the county’s court system and the fees in question cover only the cost of frivolous small claims court cases. In this case, the county is not required to remove its court system or the small claims court activity from its general fund (FT01) and, instead, report it as an enterprise fund (FT05).

Conversely, a state department of environmental protection regulation may require a water utility to recover the costs of operating its water plant (including debt service costs) through charges to its customers — the utility’s principal revenue source. Because these charges are the activity’s principal revenue source and the water utility is required to recover its costs, the utility is reported as an enterprise fund (FT05).

Examples of activities that may be accounted for as enterprise funds:

  • State unemployment compensation funds
  • Turnpike authorities
  • Lotteries
  • Universities

Once it is determined that an activity should be accounted for in an enterprise fund, the agency must establish a separate fund for each distinct service it provides.

Report all university activity as business-type activity under a single-column enterprise fund. GASB 35 superseded GASB 15 that allowed public institutions to prepare their financial statements under the model contained in the 1973 AICPA Industry Audit Guide, Audits of Colleges and Universities (AICPA College Guide model). This reporting model used NACUBO classifications and subfunds that are not used in GASB statements.

Internal Service Fund (Fund Type 06) [+]

Create an internal service fund to provide goods or services on a cost-reimbursement basis to other funds, departments or agencies of the primary government and its component units or to other governments. In some instances, a single fund provides services to both external users and the primary government. If the primary government is not the predominant participant in the activity, report the fund as an enterprise fund (FT05).

The purpose of centralizing certain activities in an internal service fund (FT06) is to achieve a level of operating efficiency that may not be available if the same activities were performed by multiple agencies within the primary government. For example, an agency sometimes centralizes the purchasing function to improve operating efficiency as well as to maintain fiscal control over the activity. Costs associated with the centralized activity are usually recovered from other agencies that benefit from the goods or services provided through the internal service fund (FT06).

It may not be necessary to establish an internal service fund if the activity involved is immaterial. But when various services are provided to numerous agencies, it is usually necessary to establish separate internal service funds in order to determine individual service costs and to restrict use of authorized resources.

Note: Based on a review of existing internal service funds, it was determined that the state of Texas has only one internal service fund — the employee’s life, accident, and health benefits fund. This fund is used to account for the services provided by the group insurance program to other agencies. The state of Texas is the predominant participant in the activity.

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Requesting an Additional GAAP Fund [+]

If the agency has new activity believed to be proprietary and it does not fit the description of existing GAAP funds, a new GAAP fund may be requested from and reviewed by the Financial Reporting section.

If the agency wants to request a new GAAP fund, see Requesting an Additional GAAP Fund.

FAQs

What financial statements are required for a proprietary fund? ›

Required proprietary fund statements are a statement of net assets; a statement of revenues, expenses, and changes in fund net assets; and a statement of cash flows.

Where do you report proprietary funds on financial statements? ›

Long-term liabilities directly related to and expected to be paid from proprietary funds should be reported in the proprietary fund statement of net position and in the government-wide statement of net position.

Which financial statements are required for a proprietary fund chegg? ›

Statements required are the Balance Sheet, the Statement of Revenues, Expenditures, and Changes in Fund Balances, and the Statement of Cash Flows.

Which financial statements are required for a proprietary fund quizlet? ›

: The required statements for proprietary funds include the Statement of Net Position, Statement of Revenues, Expenses, and Changes in Fund Net Position, and the Statement of Cash Flows. 23. Proprietary funds do not record capital assets, depreciation on those capital assets, and long-term debt.

What is the accounting principles of proprietary funds? ›

Proprietary funds use the accrual basis of accounting and the economic resources measurement focus. Proprietary funds recognize revenues when they are earned and recognize expenses when a liability is incurred.

What is included in proprietary fund? ›

Net worth ÷ Total assets Or Proprietary funds ÷ Total funds A proprietary fund means equity (i.e., share capital, free reserves of the firm, net of losses, and fictitious assets like preliminary expenses). Total assets exclude fictitious assets.

Which of the following is correct with respect to proprietary funds? ›

Which of the following is correct with respect to proprietary funds? -Proprietary funds must be adjusted when preparing the government-wide statements.

Which of the following funds are proprietary funds? ›

Which of the following funds are proprietary funds? Enterprise funds, investment trust funds, pension trust funds, and the General Fund.

How are proprietary funds calculated? ›

The proprietary ratio is expressed in the form of a percentage and is calculated by dividing the shareholders equity with the total assets of the business.

When preparing a statement of cash flows for a proprietary fund all of the following? ›

When preparing the Statement of Cash Flows for the Proprietary Funds, cash flows from noncapital financing activities include all of the following EXCEPT: Receipts from customers. The two types of proprietary funds include: Enterprise funds and internal service funds.

Which of the following would be accounted for as a permanent fund? ›

Final part 1
QuestionAnswer
which of the following would be accounted for as a permanent funda gift of 65,000 to a city to be invested permanently, with the proceeds to be used to buy books for the city library
36 more rows

Which of the following fund types is not included in the government-wide financial statements? ›

Separate financial statements are provided for governmental funds, enterprise funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements.

What are the two proprietary fund types quizlet? ›

The two types of proprietary funds include: A) Enterprise funds and capital projects funds.

What are the characteristics of a proprietary fund How do internal service funds and enterprise funds differ? ›

Proprietary funds consist of user charges collected by the government. It aids the government in managing the resources efficiently. Internal service funds account for the internal financial transactions and the enterprise funds account for the external financial transactions.

Where should internal service funds be presented on the face of proprietary fund financial statements? ›

Internal Service Funds should be aggregated in a single column to the right of Enterprise Funds in the proprietary fund financial statements.

What are the two types of proprietary funds? ›

Proprietary funds are those that are most like funds in the private sector. According to GAAFR (the Blue Book), proprietary funds are “used to account for activities that receive significant support from fees and charges.” There are two types of proprietary funds: enterprise funds and internal service funds.

What are the two types of proprietary funds and what are the major differences between those two? ›

The basic difference between them derives from who the primary customer is. Enterprise funds provide goods and services to customers outside the reporting entity; internal service funds provide goods and services to internal customers.

Which of the following bases of accounting should a government use for its proprietary funds in measuring financial position and operating results? ›

ACCRUAL BASIS ACCOUNTING

Under GAAP, the accrual basis shall be used for the government-wide financial statements, proprietary funds, component units and fiduciary funds.

How do you calculate proprietary funds on a balance sheet? ›

The proprietary ratio is calculated by dividing proprietors' funds by total assets. Proprietors' funds include share capital, reserves and surpluses as per the balance sheet. Total assets include long-term assets & short-term assets include goodwill etc as per the balance sheet.

Which format can be used for the proprietary fund statement of position? ›

For proprietary funds, governments generally present a statement of net position in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position.

What is return on proprietors funds called? ›

Return on net worth, Return on Shareholders' fund & Return on Shareholders' Investment.

What is the difference between a fiduciary and a proprietary fund? ›

Proprietary funds – used to account for business-type activities (such as activities supported, at least in part, by fees or charges). Fiduciary funds – used to account for resources held by an agency as a trustee or custodial capacity for outside parties.

Which basis of accounting is used when presenting governmental and proprietary funds in the fund financial statements? ›

Measurement Focus and Basis of Accounting

Traditionally, the majority of governmental financial information has been maintained and reported in the fund financial statements on the modified accrual basis of accounting or the accrual basis for business-type activities.

Are internal service funds proprietary funds? ›

As a proprietary fund, an internal service fund uses the total economic resources measurement focus and the accrual basis of accounting. Therefore, revenues are recognized in the accounting period in which they are earned and expenses are recognized when incurred, regardless of the timing of the related cash flows.

What are three types of funds? ›

There are three major types of funds. These types are governmental, proprietary, and fiduciary.

Which governmental funds must be reported as a major fund? ›

Major Funds

Major fund reporting is applied only to governmental funds (i.e., general, special revenue, debt service, capital project, and permanent funds) and enterprise funds. Internal service funds are excluded from the major fund reporting requirements.

What are the 5 types of governmental funds? ›

Governmental funds are classified into five fund types: general, special revenue, capital projects, debt service, and permanent funds.

What is the standard proprietary ratio? ›

The proprietary ratio (also known as the equity ratio) is the proportion of shareholders' equity to total assets, and as such provides a rough estimate of the amount of capitalization currently used to support a business.

What is the ideal proprietary ratio? ›

Solution. Ideal Proprietary Ratio should be 50%.

Why is proprietary ratio calculated? ›

The proprietary ratio is also known as equity ratio. It helps to determine the financial strength of a company & is useful for creditors to assess the ratio of shareholders' funds employed out of total assets of the company.

What are the net position categories used by proprietary funds? ›

The categories of Net Position for a proprietary fund are Net Investment in Capital Assets, Restricted Net Position and Unrestricted Net Position.

Which of the following accounts would not typically be reported on the operating statement of an internal service fund? ›

Either the indirect or direct method, depending on the method chosen for the governments Enterprise Funds. Which of the following accounts would not typically be reported on the operating statement of an Internal Service Fund? D. Maintenance expense.

Why is the statement of cash flows a required statement? ›

The cash flow statement is important because it is used to measure the cash position of the business, i.e., the inflow and outflow of cash and cash equivalents in the business for an accounting year, and it also helps the business to know the availability of cash in their business.

What are fund financial statements? ›

Fund Financial Statements (FFS)

These statements present information about major funds individually and about non-major funds in the aggregate for governmental and proprietary fund types. Fiduciary statements include financial information for fiduciary fund types.

Which of the following financial statements is required for private not for profit organizations? ›

Which of the following financial statements is required for private not-for-profit organizations? C. Statement of Cash Flows. The FASB requires that expenses of voluntary health and welfare organizations be reported according to function.

Is fund accounting a GAAP? ›

Among the basic principles of governmental GAAP is fund accounting.

Which financial statements are required for a proprietary fund? ›

Required proprietary fund statements are a statement of net assets; a statement of revenues, expenses, and changes in fund net assets; and a statement of cash flows.

Which of the following are required basic statements of a proprietary fund? ›

The required financial statements for a proprietary fund are the statement of net position and the statement of revenues, expenses, and changes in fund net position.

What is accounting principles of proprietary funds? ›

Proprietary funds use the accrual basis of accounting and the economic resources measurement focus. Proprietary funds recognize revenues when they are earned and recognize expenses when a liability is incurred.

Which of the following describes proprietary funds? ›

Which of the following describes proprietary funds? Funds used to account for a government's ongoing activities that are similar to those operated by for-profit organizations.

Which financial statements are required for proprietary funds quizlet? ›

: The required statements for proprietary funds include the Statement of Net Position, Statement of Revenues, Expenses, and Changes in Fund Net Position, and the Statement of Cash Flows. 23. Proprietary funds do not record capital assets, depreciation on those capital assets, and long-term debt.

Which financial statements are required for a proprietary fund chegg? ›

Statements required are the Balance Sheet, the Statement of Revenues, Expenditures, and Changes in Fund Balances, and the Statement of Cash Flows.

What are the three basic statements of proprietary fund accounting? ›

Proprietary fund statements of net position and revenues, expenses, and changes in fund net position should be presented using the economic resources measurement focus and the accrual basis of accounting.

Which of the following is correct with respect to proprietary funds? ›

Which of the following is correct with respect to proprietary funds? -Proprietary funds must be adjusted when preparing the government-wide statements.

What are examples of proprietary funds? ›

Also as mentioned above, proprietary funds account for business-like activities of the government. The most common example is utilities.

What is the general rule regarding the reporting of special items in the fund financial statements? ›

What is the general rule regarding the reporting of special items in fund-level financial statements? They should be displayed separately in the operating statements prepared for governmental and proprietary funds.

When preparing a statement of cash flows for a proprietary fund all of the following? ›

When preparing the Statement of Cash Flows for the Proprietary Funds, cash flows from noncapital financing activities include all of the following EXCEPT: Receipts from customers. The two types of proprietary funds include: Enterprise funds and internal service funds.

In what two basic financial statements should a government report its fiduciary funds on what basis of accounting should they be prepared? ›

Fiduciary Fund Financial Statements.

Fiduciary fund financial statements (including financial data for fiduciary funds and similar component units) should be prepared using the economic resources measurement focus and the accrual basis of accounting.

Which format can be used for the proprietary fund statement of position? ›

For proprietary funds, governments generally present a statement of net position in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position.

Which basis of accounting is used when presenting governmental and proprietary funds in the fund financial statements? ›

Measurement Focus and Basis of Accounting

Traditionally, the majority of governmental financial information has been maintained and reported in the fund financial statements on the modified accrual basis of accounting or the accrual basis for business-type activities.

What kinds of operations are accounted for using a proprietary fund give three examples? ›

A proprietary fund is used to account for governmental operations similar to those found in the private sector. They usually involve user charges. Three examples are (1) a toll road, (2) a municipal swimming pool, and (3) a city maintenance garage.

When preparing a statement of cash flows for a proprietary fund all of the following? ›

When preparing the Statement of Cash Flows for the Proprietary Funds, cash flows from noncapital financing activities include all of the following EXCEPT: Receipts from customers. The two types of proprietary funds include: Enterprise funds and internal service funds.

Which of the following is correct with respect to proprietary funds? ›

Which of the following is correct with respect to proprietary funds? -Proprietary funds must be adjusted when preparing the government-wide statements.

How are proprietary funds calculated? ›

The proprietary ratio is expressed in the form of a percentage and is calculated by dividing the shareholders equity with the total assets of the business.

Which would be reported as a component of net position of a proprietary fund? ›

Net Position, Net Investment in Capital Assets (GL 2505) – This component of net position is the difference between assets, deferred outflows, deferred inflows and liabilities of proprietary funds that consists of capital assets less: Accumulated depreciation.

What is the general rule regarding the reporting of special items in the fund financial statements? ›

What is the general rule regarding the reporting of special items in fund-level financial statements? They should be displayed separately in the operating statements prepared for governmental and proprietary funds.

Where should internal service funds be presented on the face of proprietary fund financial statements? ›

Internal Service Funds should be aggregated in a single column to the right of Enterprise Funds in the proprietary fund financial statements.

In what two basic financial statements should a government report its fiduciary funds on what basis of accounting should they be prepared? ›

Fiduciary Fund Financial Statements.

Fiduciary fund financial statements (including financial data for fiduciary funds and similar component units) should be prepared using the economic resources measurement focus and the accrual basis of accounting.

What are the two types of proprietary funds? ›

Proprietary funds are those that are most like funds in the private sector. According to GAAFR (the Blue Book), proprietary funds are “used to account for activities that receive significant support from fees and charges.” There are two types of proprietary funds: enterprise funds and internal service funds.

What are the two types of proprietary funds and what are the major differences between those two? ›

The basic difference between them derives from who the primary customer is. Enterprise funds provide goods and services to customers outside the reporting entity; internal service funds provide goods and services to internal customers.

What is the difference between a governmental fund and a proprietary fund? ›

Governmental Funds – typically are used to account for tax-supported (I.e., governmental) activities. Proprietary Funds – are used to account for a government's business-type activities (I.e., activities supported, at least in part, by fees or charges).

What are the characteristics of a proprietary fund? ›

Proprietary funds focus on the flow of economic resources recognized on the accrual basis of accounting. These funds account for all assets and liabilities related to their operations, both short-term and long-term. Internal service funds are established to improve financial management of government resources.

What are the net position categories used by proprietary funds? ›

The categories of Net Position for a proprietary fund are Net Investment in Capital Assets, Restricted Net Position and Unrestricted Net Position.

Which of the following accounts would not typically be reported on the operating statement of an internal service fund? ›

Either the indirect or direct method, depending on the method chosen for the governments Enterprise Funds. Which of the following accounts would not typically be reported on the operating statement of an Internal Service Fund? D. Maintenance expense.

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