Proprietary Funds Financial Statements

The Governmental Accounting Standards Board (GASB) governs proprietary fund financial statements for state and local governments. Proprietary funds report the full economic cost of services, including depreciation and accrued obligations, even when cash moves in another period.

Proprietary fund financial statements and government-wide financial statements both use the economic resources measurement focus and the accrual basis. They include capital assets and long-term liabilities, while recognizing revenues when earned or otherwise recognizable and expenses when incurred.

Governmental fund financial statements instead use current financial resources and modified accrual. Fiduciary fund statements use economic resources and accrual, but fiduciary activities remain outside government-wide financial statements.

An enterprise fund reports activities charging external users for goods or services, such as a municipal water utility. An internal service fund accounts for services supplied on a cost-reimbursement basis, with the reporting government as the predominant participant.

Enterprise and internal service funds compared.

Enterprise reporting may be elected for fee-supported external services. Required funds depend on principal revenue sources and the relevant financing, legal or pricing conditions.

Common mistakes

• Every proprietary fund treated alike. Internal service funds predominantly serving governmental departments generally enter governmental activities when the government-wide statements are assembled.
• Opening net position left unchanged. Ending net position is $\$390{,}000 + \$232{,}000 = \$622{,}000$; carrying forward only $390,000 omits the entire current-year change.
• Current debt excluded from capital investment. Subtracting only $410,000 produces $\$750{,}000 - \$410{,}000 = \$340{,}000$, overstating net investment in capital assets by $\$340{,}000 - \$290{,}000 = \$50{,}000$.

Bottom line

• Proprietary fund and government-wide financial statements use economic resources and accrual, with different aggregation and adjustment requirements.
• Major enterprise funds appear individually, nonmajor enterprise funds in aggregate, and internal service funds in a separate aggregate column.
• Internal service funds generally enter governmental activities unless enterprise funds are the predominant participants.
• Proprietary funds present net position, revenues and expenses and changes in fund net position, and cash flows.

Exam shortcut

The preparer confirms the reporting period and trial-balance closing status, then classifies each grant and transfer from its supporting agreement before calculating subtotals. The preparer identifies debt as capital or noncapital, then assigns its principal and interest payments to the corresponding cash-flow category. Direct cash flows follow related account movements. An operating receivable increase means recognized revenue exceeded customer collections.

The full lesson (about 5,486 words, 37 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.

Learning objectives

• III.A3

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