Government-Wide Reconciliation Entries: Converting Fund to Accrual Basis for the CPA Exam

Government-Wide Reconciliation Under GASB 34

GASB Statement No. 34 requires state and local governments to present both fund financial statements (using the modified accrual basis for governmental funds) and government-wide financial statements (using the full accrual basis). Because these two sets of statements use different measurement focuses and bases of accounting, a reconciliation is required to explain the differences between the fund-level totals and the government-wide totals. Understanding these reconciliation entries is one of the most challenging and heavily tested governmental accounting topics on the CPA FAR exam.

Two Required Reconciliations

GASB 34 requires two reconciliations:

A reconciliation of the total fund balances of governmental funds to the net position of governmental activities in the government-wide statement of net position (balance sheet reconciliation).
A reconciliation of the total change in fund balances of governmental funds to the change in net position of governmental activities in the government-wide statement of activities (operating statement reconciliation).

These reconciliations can be presented either at the bottom of the fund financial statements or in an accompanying schedule.

Major Reconciliation Categories

1. Capital Assets

Governmental funds do not report capital assets. Under modified accrual, capital outlays are recorded as expenditures in the period of acquisition. In the government-wide statements, capital assets are capitalized and depreciated over their useful lives.

Balance sheet reconciliation: Add capital assets (net of accumulated depreciation) to total fund balances.

Operating statement reconciliation: Remove capital outlay expenditures (they are not expenses in the government-wide statements) and add depreciation expense (which is not recorded in the fund statements). The net effect depends on the relative magnitude of current-year capital outlays and depreciation.

2. Long-Term Liabilities

Governmental funds report debt proceeds as other financing sources and debt service payments (principal and interest) as expenditures. They do not report long-term liabilities on the balance sheet because the current financial resources measurement focus excludes them. In the government-wide statements, long-term liabilities (bonds payable, notes payable, compensated absences, pension liabilities, OPEB liabilities, lease liabilities) are reported on the statement of net position.

Balance sheet reconciliation: Subtract long-term liabilities from total fund balances. Also add deferred charges on bond issuance costs (if applicable) and subtract unamortized premiums or add unamortized discounts on bonds.

Operating statement reconciliation: Remove bond proceeds (not revenue at the government-wide level) and principal repayments (not expenses). Add accrued interest expense that is not yet due (governmental funds only recognize interest expenditure when it is due). Add changes in compensated absences, pension obligations, and other long-term liabilities.

3. Deferred Outflows and Deferred Inflows of Resources

Certain items are recognized as deferred outflows or deferred inflows of resources in the government-wide statements but not in the fund statements. Examples include deferred amounts related to pensions, OPEB, and refunding of debt. These must be added (deferred outflows) or subtracted (deferred inflows) in the reconciliation.

4. Internal Service Funds

Internal service funds are proprietary funds that predominantly serve governmental funds. Their activities are already reported on the full accrual basis, but they are not included in the governmental fund statements. In the government-wide statements, internal service fund balances and activities are typically consolidated with governmental activities.

Balance sheet reconciliation: Add the net position of internal service funds to total governmental fund balances.

Operating statement reconciliation: Add the change in net position of internal service funds (net of any amounts charged to other funds) to the change in fund balances.

5. Revenue Recognition Differences

Governmental funds recognize revenue only when it is both measurable and available (collected within the current period or soon enough thereafter to be used to pay current-period liabilities, typically 60 days). Government-wide statements recognize revenue when earned (full accrual). Differences arise for items such as property taxes, grants, and other receivables that are earned but not yet available.

Balance sheet reconciliation: Add receivables that are not available (deferred inflows in the fund statements become revenue in the government-wide statements).

Operating statement reconciliation: Adjust for the change in unavailable revenue during the period.

Reconciliation Example: Operating Statement

A simplified reconciliation might read:

Net change in fund balances -- total governmental funds: $500,000

Amounts reported in the statement of activities are different because:

Capital outlays reported as expenditures in the fund statements are capitalized in the statement of activities: +$800,000
Depreciation expense reported in the statement of activities: -$300,000
Bond proceeds reported as other financing sources in fund statements are not revenues: -$1,000,000
Repayment of bond principal reported as expenditures in fund statements reduces long-term liabilities: +$200,000
Change in accrued interest payable: -$15,000
Change in compensated absences liability: -$25,000
Revenue reported in the statement of activities not meeting availability criteria for fund statements: +$40,000
Internal service fund change in net position: +$10,000

Change in net position of governmental activities: $210,000

Exam Preparation Tips

Memorize the major reconciliation categories: capital assets, long-term liabilities, deferred outflows/inflows, internal service funds, and revenue recognition differences.
Understand the direction of each adjustment: what is added and what is subtracted from fund balances to arrive at net position.
Practice both the balance sheet reconciliation and the operating statement reconciliation -- the exam tests both.
Remember that internal service funds are consolidated with governmental activities in the government-wide statements.
Be ready for simulations that require you to prepare a complete reconciliation schedule from given fund financial statement data.