Internal Service Funds

Chapter 11

Learning Objectives

Understand nature and usage of ISFs Understand applicable accounting principles Understand pricing policies and methods Prepare basic journal entries

Prepare financial statements Understand unique aspects of self-insurance funds Understand problems associated with significant accumulated increases or decreases in total net position
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Purpose

To finance, administer, and account for departments or agencies whose exclusive or nearly exclusive mission is to provide goods and services to the governments other departments on a cost reimbursement basis.

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Goals of ISFs

Attain greater economy, efficiency, and effectiveness in acquisition and distribution of common goods and services used by other departments Facilitate the equitable sharing of costs among departments served

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General Missions of ISFs

Distribute common or joint costs telephone, radio, or other communication costs Acquire, distribute, and allocate costs of selected items of inventory, such as office supplies or gasoline Provide temporary loans to other funds
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Common ISF Examples

Motor pools Data-processing activities Copying and printing facilities Repair shops and garages Cement and asphalt plants Purchasing, warehousing, and distribution services Insurance and other risk management services
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General Principles

Measurement Focuseconomic resources Basis of Accountingaccrual

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Creating an ISF: Transfer from GF

(Page 445)

General Fund OFUTransfer to ISF Cash

Internal Service Fund Cash Transfer from GF

50,000 50,000

50,000 50,000

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Create an ISF: Long-Term Loan

(Page 445)

General Fund Advance to ISF* Cash

Internal Service Fund Cash Advance from GF

50,000 50,000

50,000 50,000

*A corresponding amount will be reported in the GF Nonspendable Fund Balance.

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Create an ISF: Issue Bonds

Cash Bonds Payable

(Page 445)

100,000
100,000

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Create an ISF: General Obligation Bonds (Page 445)

General Fund Cash OFSBond Principal OFUTransfer to ISF Due to ISF
General Long-Term Liabilities Net Position Bonds Payable 100,000 100,000 100,000 100,000

100,000 100,000
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Create an ISF: General Obligation Bonds (Page 446) (continued)

Internal Service Fund Due from GF Transfer from GF
100,000 100,000

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Create an ISF: Transfer of Capital Assets (Page 446)

General Capital Assets Net Position Accumulated DepreciationEquipment Equipment
Internal Service Fund Equipment Accumulated Depreciation Equipment RevenuesCapital Contributions 18,000 12,000 30,000

30,000

12,000 18,000

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Special Notes on Capital Asset Transfer

No entry in GF since capital asset is not accounted for there Reclassification is a Capital Contribution in ISFimpact on government-wide financial statements

Will be eliminated if ISF activity combined with governmental activities Will become a transfer if ISF activity combined with business-type activities
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Pricing Policies

Typical choices

Historical cost Direct cost, when other costs are insignificant

ISFs usually have a monopoly, so pricing needs to be monitored closely Excessive charges must be avoided

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Pricing Methods
1.
2.

Predetermined ratesso much per page, mile, or order Charge departments based on actual cost

Predetermined rates preferred because Departments need to know charges at time work is done Actual cost charges may result in inequitable allocations among departments
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Relation to Budget
Budget may not be used since level of activity depends on demand, not predetermined spending by the fund

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Financial Statements

Statement of Net Position Statement of Revenues, Expenses, and Changes in Fund Net Position Statement of Cash Flows

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ISF Accounting Illustrations

Three funds in example: Central Automotive Equipment Fund (CAEF) Stores Fund (SF) Self-Insurance Fund (SIF)

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Central Automotive Equipment Fund

Accounts for vehicular capital assets used throughout the government Bills other functions for use of vehicles on per-mile or per-hour basis Maintains records on actual costs for comparison with estimates to determine future cost allocations Records also useful for evaluating efficiency of management and economy of operation for various vehicles

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CAEF Buys Equipment and Supplies

#1 (Page 449) Machinery and Equipment Notes Payable Cash #2 (Page 449) Inventory of Materials and Supplies Vouchers Payable

40,000
15,000 25,000

10,000 10,000
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#3 CAEF Pays Salaries and Wages

(Page 449)

ExpensesMechanics Wages ExpensesIndirect Labor ExpensesSuperintendents Salary ExpensesOffice Salaries Cash

9,000 3,000 3,500 3,500

19,000

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#4 CAEF Pays for Utilities

ExpensesHeat, Light, and Power Cash

(Page 450)

2,000
2,000

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#5 CAEF Records Depreciation

(Page 450)

ExpensesDepreciation Building ExpensesDepreciation Machinery and Equipment Accumulated Depreciation Building Accumulated Depreciation Machinery and Equipment
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2,400

9,200
2,400 9,200
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#6 Billings to Other Departments

(Page 450) CAEF Due from General Fund Due from Enterprise Fund RevenuesBillings to Departments 30,000 12,800 42,800

General Fund (Not shown in book) ExpendituresOperating Due to CAEF Enterprise Fund (Not shown in book) ExpensesAutomotive Due to CAEF

30,000 30,000

12,800 12,800
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#7 Routine Voucher Payments

(Page 450)

Vouchers Payable Cash

7,500
7,500

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#8 Collections from Other Departments

(Page 450) CAEF Cash Due from General Fund Due from Enterprise Fund 39,000 29,000 10,000

General Fund Due to CAEF Cash

(Not shown in book)

29,000 29,000
(Not shown in book)

Enterprise Fund Due to CAEF Cash

10,000 10,000
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#9 Paying General Expenses

(Page 450)

ExpensesOffice Maintenance Cash

200
200

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#10 Using SuppliesConsumption Method required (Page 450)

ExpensesCost of Materials and Supplies Used Inventory of Materials and Supplies 7,000 7,000

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#11 Year-End Accruals

ExpensesInterest ExpensesMechanics Wages ExpensesIndirect Labor ExpensesSuperintendents Salary ExpensesOffice Salaries Accrued Interest Payable Accrued Salaries and Wages Payable

(Page 451)

400 500 150 175 175

400 1,000

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Central Stores Fund (CSF)

Used to centralize purchasing and warehousing operations Enhances economy, efficiency, and control Holds inventory until requested by departments Billings based on direct inventory cost plus overhead factor
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CSF Inventory Acquisition:

Consumption Method required
Inventory of Supplies and Materials Vouchers Payable
(Page 453)

20,000
20,000

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Perpetual Inventory Procedures

Department submits stores requisition Storekeeper issues requested supplies Cost of issuance determined using direct cost of supplies and overhead application Department billed for supplies issued

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Inventory Issued

(Page 455)

CSF Due from General Fund Cost of Materials and Supplies Issued Billings to Departments Inventory of Materials and Supplies
General Fund (Page 456) ExpendituresMaterials Due to CSF

2,704 2,600 2,704 2,600

2,704

2,704

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Overhead Expenses
Salaries and Wages Expense Vouchers Payable

(Page 455)

1,000
1,000

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Physical Inventory

Should be done at least annually Adjust records to match physical count usually have a shortage due to breakage, theft, or improper recording Losses would be included in subsequent overhead charges

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Recording Inventory Shortage

(Page 455)

Inventory Losses Inventory of Materials and Supplies

2,000
2,000

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Self-Insurance Fund (SIF)

Full insurance coverage for all types of risk can be prohibitively expensive Self-insurance used to cover some losses Amounts set aside should be actuarially determined

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Consolidating Risk Financing Activities

GASB Statement #10 (as amended by GASB Statement #66) gives governments three options: General Fund Special Revenue Fund Internal Service Fund

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General Fund or Special Revenue Fund

All claims and judgments recorded in GF/SRF when paid or due Remainder is recorded in GLTL accounts Amounts charged to other funds recorded as reduction of expendituresreimbursements, not revenues May not accumulate reserves for catastrophic losses

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Internal Service Fund

All claims and judgments recorded in ISF when incurredmay be current or longterm liability GLTL accounts are not involved Amounts charged to other funds recorded as revenues May accumulate reserves for catastrophic losses
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Requirements in Using ISFs

Recognize all claims and judgments liabilities and expenses in ISF Charge other funds amounts that are reasonable and equitablepreferably actuarially basedso that ISF revenues and expenses are approximately equal Accumulated net position should be disclosed in notes as being designated for future catastrophic losses Determine whether amounts paid to ISFs that differ from required amounts are in substance interfund loans or transfers

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Accounting Aspects for SIFs

Revenues from billings to departments Investment of SIF resources Recognition and settlement of claims and judgments

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Revenue Recognition

Amounts paid based on actuarial estimates should be recorded as revenues Overpayments

If intended to cover next years contribution, record as deferred revenues If not so intended, payment may be a loan, advance, or transfer

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Expense Recognition

Information prior to issuance of financial statements indicate that it is probable that an asset was impaired or a liability was incurred at date of statements

AND Amount of loss can be reasonably

estimated

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#1 Establish SIF
General Fund OFUTransfer to SIF Cash
Self-Insurance Fund Cash Transfer from GF

(Page 459)

500,000 500,000

500,000

500,000

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#2 Billings to Departments
(Page 459) General Fund ExpendituresOperating Due to SIF Enterprise Fund ExpensesClaims and Judgments Due to SIF Self-Insurance Fund Due from GF Due From EF RevenuesBillings to Departments

80,000
80,000

20,000
20,000

80,000 20,000
100,000
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#3 Collections of Billings
General Fund Due to SIF Cash Enterprise Fund Due to SIF Cash Self-Insurance Fund Cash Due from GF Due from Enterprise Fund

(Page 459)

60,000 60,000

15,000 15,000

75,000 60,000 15,000

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#4 Purchase of Investments
(Page 460)

Investments Cash

460,000
460,000

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#5 Paid Premiums to Insurers

(Page 460)

ExpensesInsurance Premiums Prepaid Insurance Cash

7,500 500 8,000

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#6 Payments to Settle Claims

(Page 460)

ExpensesClaims and Judgments Cash

22,000
22,000

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#7 Accruing Probable Losses and Paying Administrative Expenses

(Page 460)

ExpensesClaims and Judgments ExpensesAdministrative Liability for Claims and Judgments Current Liability for Claims and Judgments Long-term Cash

70,000 3,800
35,000 35,000 3,800

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#8 Accruing Interest on Investments

(Page 460)

Accrued Interest Receivable RevenuesInterest

27,600
27,600

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#9 Recording Change in Fair Value

(Page 460)

Investments RevenuesNet Increase (Decrease) in Fair Value of Investments

1,200
1,200

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Disposition of Increase/Decrease in Net Position

Charged or credited to billed departments based on usage Closed to Net Position with intention of modifying subsequent years charges Closed to Net Position with no adjustments assumes that fund will have profitable and loss years and will breakeven over time

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Reasons for Building Net Asset Balances

Accumulate resources for catastrophic losses Planned purchase of additional capital assets or expanded operations

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