Policy Reference:

National Council on Governmental Accounting (NCGA) Statement 1

GASB Statement No. 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

(GASB Codification Section 1600 – Basis of Accounting)

Process and Document Preparation:

BASIS OF ACCOUNTING

The basis of accounting determines the timing for reporting measurements made on a cash or accrual basis in the State’s financial statements. As defined in GASB Statement 63, the basis of accounting refers to when revenues, expenditures, expenses, and transfers - and assets, deferred outflows of resources, liabilities, and deferred inflows of resources - are recognized in the accounts and reported in the financial statements. The accounting basis determines when the economic consequences of transactions and events are reflected in financial statements.

MEASUREMENT FOCUS

Unlike the selection of an accounting basis, which is concerned with the timing of transactions and events, a measurement focus identifies what transactions and events should be recorded. The measurement focus is concerned with the inflow and outflow of resources that affect a fund’s operating statement.

The operating statement of a proprietary fund focuses on changes in economic resources, much like that of a private-sector business. Net position is used as a practical measure of economic resources for this purpose. A proprietary fund’s operating statement includes all transactions and events that increase or decrease net position, such as revenues, expenses, gains and losses.

The operating statement of a governmental fund, unlike that of a proprietary fund, focuses on changes in current financial resources. The governmental fund operating statement measures those transactions and events of the period that have increased or decreased the resources available for spending in the near future.

A fund’s basis of accounting is inseparably tied to its measurement focus. Funds that focus on total economic resources (proprietary funds) employ the accrual basis of accounting, which recognizes increases and decreases in economic resources as soon as the event or transaction occurs. Thus, revenues are recognized as soon as they are earned and most expenses are recognized as soon as a liability is incurred, regardless of the timing of related cash inflows and outflows.

On the other hand, funds that focus on current financial resources (governmental funds) use the modified accrual basis of accounting, which recognizes increases and decreases in financial resources only to the extent that they reflect near-term inflows or outflows of cash. Under the modified accrual basis of accounting, amounts are recognized as revenue when they are both measurable and available. The accrual basis, modified accrual basis, and cash basis of accounting are discussed below.

ACCRUAL BASIS ACCOUNTING

Under the accrual basis of accounting, revenues are recognized when they are earned regardless of when cash is received, and most expenses are recognized when a liability is incurred regardless of when paid. However, these accruals should be recognized only if measured objectively. Since accrual accounting results in accounting measurements based on the substance of transactions and events, rather than when cash is received or disbursed, it enhances the relevance, neutrality, timeliness, completeness, and comparability of the information reported. Under GAAP, the accrual basis shall be used for the government-wide financial statements, proprietary funds, component units and fiduciary funds.

MODIFIED ACCRUAL BASIS ACCOUNTING

Under this basis, revenues are recognized in the accounting period in which they become susceptible to accrual; that is, when they become measurable and available to finance expenditures of the fiscal period. The requirement that revenues be "available" distinguishes modified accrual revenue recognition from that of the accrual basis. The term "available" is defined as expected to be collected within twelve months after the fiscal period ended.

Under the modified accrual basis, expenditures are recognized in the accounting period in which the fund liability is incurred, measurable, and expected to be paid within twelve months of the fiscal period ended. However, there are certain exceptions such as the recording of the un-matured principal and interest on general obligation, long-term debt which are recorded only when due. Other exceptions are discussed in the appropriate sections of this manual.

Modified accrual basis accounting is used for all governmental funds (general, federal special revenue, other special revenue, general debt service, debt service, and capital projects).

CASH BASIS ACCOUNTING

Under the cash basis, transactions are recognized only when cash changes hands. Cash basis financial statements omit recognition of assets and liabilities not arising from cash transactions. Therefore, they rarely present financial position or results of operations in conformity with GAAP.

Cash basis accounting and reporting are not desirable practices because they permit distortions in financial statement representations due to shifts in the timing of cash receipts and disbursements relative to underlying economic events near the end of a fiscal period. The cash basis of accounting, which is used for budgetary purposes, is not an acceptable basis of accounting for the purpose of preparing the State's GAAP financial statements.

Guide to Financial Operations

REV. 04/23/2019