Accounts and Reports

GAAP POLICY AND PROCEDURE MANUAL

• Interfund activities include all provisions of internal service funds.
• Internal service funds may be used to report any activity that provides goods or services to other funds, departments, or agencies of the primary government and its component units, or to other governments, on a cost-reimbursement basis. Internal service funds should be used only if the reporting government is the predominant participant in the activity. Otherwise, the activity should be reported as an enterprise fund. GASB 34 Paragraph 68.
• Reporting for interfund activities: consolidation and elimination -there are four types of interfund transactions.
  Reciprocal in nature (exchange and exchange-like). 1.) Interfund loans and interfund payables to be repaid. If not repaid within a reasonable time, the interfund balance should be reduced and the amount that is not expected to be repaid should be reported as a transfer from one fund to the fund that received the loan. 2.) Interfund services provided and used. Sales and purchases of goods and services between funds should be reported as "REVENUE AND EXPENDITURES". Unpaid dollar amount should be reported as interfund receivable and interfund payables in the fund balance sheet or fund statement of net assets. Non-reciprocal. Interfund transactions are non-exchange activity: 3.) Interfund transfers - not required to repay and no exchange of assets. Transfers are reported under"other financing source" within governmental funds. For proprietary funds, these are reported after "non-operating revenues and expenses" with lines for "transfers in" and "transfers out". See paragraph 100 and 101. 4.) Interfund reimbursements - repayment from the fund responsible for particular expenditures or expenses to the fund initially paid. Reimbursement should not be displayed in financial statement.
• Eliminations and re-classifications - In the process of aggregating data for the statement of net assets and the statement of activities, some amounts reported as interfund activity and balances in the funds should be eliminated or reclassified. GASB 34 Paragraph 57.
• Internal balances -statement of net assets. Elimination should be made in the statement of net assets to minimize the "grossing-up" effect on assets and liabilities within the governmental and business-type activity columns of the primary government. As a result, amounts reported in the funds as interfund receivables and payables should be eliminated in the governmental and business-type activities columns of the statement of net assets, except for the net residual amounts due between governmental and business-type activities, which should be presented as internal balances. Amounts reported in the funds as receivable from or payable to fiduciary funds should be included in the statement of net assets as receivable from and payable to external parties (consistent with the nature of fiduciary funds), rather than as internal balances. All internal balances should be eliminated in the total primary government column. GASB 34 Paragraph 58.
• Internal activities - statement of activities. Eliminations should be made in the statement of activities to remove the "doubling-up" effect of internal service fund activity. The effect of similar internal events (such as allocations of accounting staff salaries) that are, in effect, allocations of overhead expenses from one function to another or within the same function also should be eliminated, so that the allocated expenses are reported only by the function to which they were allocated. GASP 34 Paragraph 59. One more example is provided here to further the understanding of the double reporting of overhead. When one department bills another for its share of overhead, the billing department treats the payment received from the billed department as revenue rather than as a reduction of expenditure or expense. Both the billing department and the billed department end up reporting an expenditure or expense for the same underlying overhead charges. See GAAFR chapter 10 page 166.
• Intra-entity activity - Resource flows between the primary government and blended component units should be reclassified in accordance with the provisions of GASB 34 Paragraph 112 as internal activity in the financial statements of the reporting entity. Resource flows (except those that affect the balance sheet only, such as loans and repayments) between a primary government and its discretely presented component units should be reported as if they were external transactions - that is, as revenues and expenses. However, amounts payable and receivable between the primary government and its discretely presented component units or between those components should be reported on a separate line. GASB 34 Paragraph 61.
• Reporting internal service funds balance - Internal service fund asset and liability balances that are not eliminated in the statement of net assets should be reported in the governmental activities column. Although internal service funds are reported as proprietary funds, the activities accounted for in them (the financing of goods and services for other funds of the government) are usually more governmental than business-type in nature. If enterprise funds are the predominant or only participants in an internal service fund, however, the government should report that internal service fund's residual assets and liabilities within the business-type activities column in the statement of net assets. GASB 34 Paragraph 62 GASB Statement 34 requires the elimination of the effect of internal service fund activity in the statement of activities utilizing "look back" method. Internal service fund net income would cause a pro rata reduction in the charges made to the participating funds/functions. On the other hand, an internal service fund net loss would require a pro rata increase in the amounts charged to the participating funds/functions. Paragraph 314. As a practical matter, the process of eliminations described in paragraph 314 is not necessary unless the effect on direct expenses or program revenues is material. Paragraph 315.

• "Grossed up" amounts are not eliminated in STARS. Eliminations have not been made to remove the "doubling up effect" of internal service activity reported on interfund vouchers for allocations of overhead expenses.
• Negative expenditures on interfund vouchers (IFV's) have been discouraged by Accounts and Reports. The Informational Circular No. 02-A-008 issued on January 11, 2002 has changed the accounting practice to properly record interfund reimbursements as a reduction of expenditures.

• Determine what is currently classified as an internal service fund.
• The State of Kansas determined that twenty-one funds: 6102, 6105, 6109, 6110, 6113, 6114, 6115, 6130, 6131, 6143, 6145, 6146, 6147, 6148, 6149, 6151, 6155, 6161, 6162, 6163, 6164 from six agencies: 172, 173, 280, 410, 494 and 710 are currently utilized as internal service funds. Based on the service nature, DISC, the Division of Printing, Central Motor Pool, Accounts and Reports and Facilities Management do not require elimination process.
• Determine method to capture entries that are "grossed up" and transactions that should be eliminated. Prepare eliminating entries for interfund reimbursements not recorded as a reduction of expenditures.
      Dr. GLA 4001 Revenue
         Cr. GLA 5001 Expenditures
• Determine repayment or non-repaid loans. Prepare adjustment entries to reclassify from STARS revenue and expenditures to accounts payable and receivable.
      Dr. GLA 1010 Accounts receivable
         Cr. GLA 5001 Expenditures
  or
      Dr. GLA 4001 Revenue
         Cr. GLA 2020 Accounts payable
• Determine the consolidation entries for internal service funds to pro-rate profit/loss by functions.
      Dr. GLA 3007 Fund balance - Internal service funds
         Cr. GLA 5001 Expenditures of various functions (net profit)
  or
      Dr. GLA 5001 Expenditures of various functions
         Cr. GLA 3007 Fund balance - Internal service funds (net loss)
• We still need consolidation adjustments for transfers and elimination adjustments for interfund balances.
• Determine method of financial reporting. Internal service funds are reported on the Government-Wide Financial Statement under governmental type activities and on the State of Kansas Proprietary Funds Financial Statement under governmental activities.
• Determine nature of any funds charging other funds for services, and how these are accounted for Special revenue funds charging for services provided and used are treated as governmental funds.

• Notes to the financial statements essential to fair presentation at the General Purpose Financial Statement (GPFS) level should include interfund receivables and payables (NCGA Interpretation 6). (See also GASB 38, Paragraph 14, 15 for more information) Governments should disclose, in their summary of significant accounting policies, the policy for eliminating internal activity in the statement of activities.

• Internal service fund net income/loss should cause a pro rata reduction in the charges made to the participating funds / functions in the Statement of Activities. Because the effect on expenses/expenditures or revenues is considered immaterial, the State will opt not to pro rate the net income/loss. The state will list it in the "Statement of Activities" under Governmental Activities column as "Other Revenue". If the net income/loss is ever determined to be material an allocation table will be prepared. This allocation table will be used to allocate the net income / loss of the internal service funds.
• The amount of interest income, interest expense and transactions with outside parties of the internal service funds is deeded negligible.
• In future years, the State will need to ensure that charges from the internal service funds are not coded to transfers.
• An informational circular (02-A-008) was published on 1/11/2002 aimed in educating agencies on how to process true reimbursements in compliance with GAAP.

• All agencies may process interfund vouchers. For Annual Financial Reporting purposes, internal service funds affect agency 172, 173, 280, 410, 494, 710.