Enterprise funds account for the operations of commercial-type activities of a governmental entity such as utilities, airports, seaports, and recreational facilities, which sell services to the public, and perhaps to other funds of the governmental entity, at a profit. Because of their similarity to business enterprises, enterprise funds of a governmental entity use the accrual basis of accounting, with short-term prepayments, depreciation expense, and doubtful accounts expense included in the funds' accounting records.
Among the ways in which financial statements of an enterprise fund of a governmental entity differ from financial statements of a business enterprise are the following:
Enterprise funds have no income taxes expense; however, the operating expenses of an enterprise fund may include a payment in lieu of property taxes to the general fund of the governmental entity.
Instead of capital stock, thestatement of net assets of an enterprise fund includes contributed capital from general fund in the net assets section.
Following current assets in the statement of net assets of an enterprise fund is a restricted assets section—typically cash and short-term investments—in the total amount of cash deposits made by customers and unexpended proceeds of revenue bonds issued to finance construction of plant assets for the enterprise fund.
Following current liabilities in the statement of net assets of an enterprise fund is a section for liabilities payable from restricted assets, which includes accrued interest and current maturities of revenue bonds as well as customers' deposits.
A restricted net assets category of an enterprise fund typically is provided in an amount equal to the cash and short-term investments of the enterprise fund that are restricted to payment of interest and principal of revenue bonds.
Subsidy-type transfers to the general fund from an enterprise fund are reported in the transfers section of the enterprise fund's statement of revenues, expenses, and changes in net assets.
The statement of cash flows for a governmental entity's enterprise fund has four categories of cash flows: from operating activities, from noncapital financing activities, from capital and related financing activities, and from investing activities. In the indirect method, operating income, rather than increase (decrease) in net assets, is reconciled to net cash provided by operating activities.
An internal service fund of a governmental entity sells supplies and services to other funds of the governmental entity but not to the public. Except for the lack of a profit motive, the operations of an internal service fund resemble those of a business enterprise. The revenues of an internal service fund generally are adequate to cover the fund's operating costs and expenses, with perhaps a modest increase in net assets.
Because internal service funds do not issue revenue bonds and do not receive contributions or deposits from customers, their financial statements are nearly identical in form and content to the financial statements of business enterprises, except for four categories of cash flows. Similar to the statement of net assets of an enterprise fund, the statement of net assets of an internal service fund includes contributed capital from general fund in the net assets section.
In GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds," the GASB provided temporary guidance for governmental entities for applying business enterprise-type accounting standards, as appropriate, to their proprietary funds.
Agency funds, expendable and nonexpendable private-purpose trust funds, investment trust funds, and pension trust funds constitute the fiduciary funds category of a governmental entity. The position of the governmental entity with respect to such funds is that of a custodian or trustee rather than an owner.
Agency funds, which are of short duration, are established by a governmental entity to account for sales taxes, payroll taxes, other deductions withheld from salaries and wages payable to governmental entity employees, and amounts set aside as deferred compensation for such employees.
Because agency funds do not have operations during a fiscal year, the only financial statements for such funds are a statement of assets and liabilities showing cash or receivables and amounts payable to other funds or governmental entities or to outsiders, and a statement of changes in assets and liabilities.
An expendable private-purpose trust fund is one whose principal and income both may be expended to achieve the objectives of the trust. A nonexpendable private-purpose trust fund is one whose principal remains intact; only the revenues of such a fund are expended to carry out the objectives of the trust. A nonexpendable trust fund requires two separate accounting entities: one for principal and one for revenues. Because the governmental entity acts as a custodian for a private-purpose trust fund, accounting for such a trust fund should comply with the trust indenture.
The financial statements for both expendable trust funds and nonexpendable trust funds are a statement of changes in fiduciary net assets and a statement of fiduciary net assets. Trust indentures may provide that there is to be no unreserved and undesignated net assets balance for a trust fund.
Pension trust funds involve accounting for liabilities and net assets reserves that are computed on the basis of actuarial assumptions regarding such matters as life expectancies of governmental entity employees and rates of earnings on pension trust fund assets. Pension trust funds are accounted for in essentially the same manner as proprietary funds; thus, the accounting records of pension trust funds are maintained under the accrual basis.
The statement of changes in fiduciary net assets of a governmental entity's pension trust fund has additions such as employee contributions, employer (governmental entity) contributions, and investment net gains; and deductions such as annuity benefits, disability benefits, refunds of contributions, and administrative expenses. Typical assets and liabilities of a pension trust fund include cash, interest and dividends receivable, investments, plant assets, refunds payable, and other liabilities. The net assets of a pension trust fund are held in trust for pension benefits.
Sponsoring governments are required by GASB Statement No. 31, "Accounting and Financial Reporting for . . . External Investment Pools," to establish investment trust funds for investments of smaller governmental entities entrusted to the sponsoring government for investments in higher-yielding financial instruments than the smaller governmental entities have the capacity to acquire. Financial statements for the investment pools are the same as for pension trust funds: a statement of fiduciary net assets and a statement of changes in fiduciary net assets.
The Governmental Accounting Standards Board requires state and local governmental entities to prepare a comprehensive annual financial report (CAFR) as a matter of record. Components of a CAFR are an introductory section; management's discussion and analysis; basic financial statements; required supplementary information other than management's discussion and analysis; and a combining and individual fund statements, schedules, narrative explanations, and statistical section.
