Question

Recast the balance sheets of the two funds into a single consolidated balance sheet (statement of net position). Show separately, however, the restricted and the unrestricted portions of the consolidated net position (not each individual asset and liability). Be sure to eliminate interfund payables and receivables.

2. Which presentation, the unconsolidated or the consolidated, provides more complete information? Explain. Which presentation might be seen as misleading? Why? What, if any, advantages do you see in this presentation even though it might be less complete and more misleading?

Answer 1

Recast the balance sheets of the two funds into a single consolidated balance sheet (statement of net position). Show separately, however, the restricted and the unrestricted portions of the consolidated net position (not each individual asset and liability). Be sure to eliminate interfund payables and receivables.

Answer

The basic financial statements are the end product of the accounting system. Armed with an overview of the end product, students should find it easier to appreciate the discussions in the next few chapters. Those chapters should fill in the blanks concerning how information is selected and recorded in the various funds and how recorded information is summarized for external reporting.

Each fund is a separate fiscal and accounting entity with its own selfbalancing set of accounts. Thus, financial statements, such as a balance sheet and a statement of revenues and expenditures or expenses, can be prepared for each individual fund. However, governments may maintain hundreds of funds. A way is needed to summarize fund information for financial reporting so that the reports are of a manageable size but still provide useful information, including the restrictions on resources that funds represent.

The transactions of the authority are accounted for

in the following governmental fund types:

_ General fund—To account for all revenues and

expenditures not required to be accounted for in

other funds.

_ Capital projects fund—To account for financial

resources designated to construct or acquire capital

facilities and improvements. Such resources

are derived principally from other municipal utility

districts to which the Williamsburg Regional

Sewage Treatment Authority provides certain

services.

Williamsburg Regional Sewage

Treatment Authority

Bal sheet

October 31, 2012

Cash $ 751 $ 5,021

Time deposits 16,398

Due on insurance claim 9,499

Due from general fund 9,000

Due from participants 66,475 4,414

Total assets $76,725 $34,833

Liabilities and fund balance:

Accounts payable $17,725

Due to capital projects fund 9,000

26,725

Fund balance 50,000 34,833

Total liabilities and fund balance $76,725 $34,833

Fund Types

The transactions of the authority are accounted for

in the following governmental fund types:

_ General fund—To account for all revenues and

expenditures not required to be accounted for in

other funds.

_ Capital projects fund—To account for financial

resources designated to construct or acquire capital

facilities and improvements. Such resources

are derived principally from other municipal utility

districts to which the Williamsburg Regional

Sewage Treatment Authority provides certain

services.

2. Which presentation, the unconsolidated or the consolidated, provides more complete information? Explain. Which presentation might be seen as misleading? Why? What, if any, advantages do you see in this presentation even though it might be less complete and more misleading?

Answer

1. Consolidation rules apply at the level of the sector and the sub-sector:

Sector level: all transactions and stock positions between institutional units within the boundary of the sector are eliminated.

Sub-sector level: all transactions and stock positions between institutional units within the boundary of the sub-sector are eliminated. This means that transactions or positions of institutional units in the sub-sector with institutional units outside of the sub-sector concerned are retained.

2. It will clearly follow that the sum of financial assets/liabilities and financial transactions over the consolidated sub-sectors accounts does not necessarily equal the financial assets/liabilities and financial transactions for the consolidated sector accounts. The sum will be equal only in case of no transactions and positions between sub-sectors, but will higher in other cases.
3. It can be noted that the balancing items (net lending/net borrowing) still add across for the sub-sectors and equal the sector total. Moreover, they are identical with the balancing items in the non-consolidated accounts.
4. Terminology and simplified example:

The following graphic introduces a series of terms and explains what is meant by ‘intra’ and ‘inter’:

• ‘Intra’ indicates that it is the relationships within a named sector or sub-sector that are being referred to.
• ‘Inter’ refers to flows or positions between sectors or between sub-sectors that are referred to.

In both cases the context or position within the range of sectors or sub-sectors must be known to correctly specify the set of relationships subject to the discussions. (This context is shown most efficiently in the attached figurine.)

The figurine, and later example, takes the General Government sector as a single main example. It is emphasised that this is for illustrative purposes and that the principles outlined apply to all ESA 95 sectors or sub-sectors.

The consolidation of short-term securities involves a specific treatment. As a supervisor of short-term securities issues, the Banque de France records information on issuers and buyers on the primary market. It is then assumed that short term securities are not sold on a secondary market, an assumption that is not entirely false given that these securities, which, legally have an original maturity of less than one year, are, in practice, frequently of even shorter maturity. Moreover, the original maturity of each individual security is known. It is thus possible to calculate the outstanding amount of short-term securities held by the different sectors by issuer. This information is crossed with balance of payment data. Consolidation is carried out on the basis of this counterpart information.

In remaining cases, there is no room for consolidation because, by nature, the transaction involves different sub-sectors. This is the case for monetary gold and SDR, which are held by central banks and issued by international institutions located in the “rest of the world”, deposits from non financial entities in financial institutions such as saving books and contractual savings, deposits with international institutions, loans from financial institutions to non financial entities, households’ net equities in life insurance reserves. Currencies issued by central banks and held by other sectors are not consolidated at the sub-sector level but at the sector level, as central banks and other financial institutions are in the same sector.

1. Consolidation by sector and sub-sector

In the French financial accounts, the sub-sectors financial auxiliaries, households unincorporated enterprises, other households and non-profit institutions serving households are not subject to consolidation because direct information on these entities is insufficient. These sub-sector’s accounts are compiled mainly on the basis of counterpart information from financial institutions and the balance of payments that does not enable the identification of financial links inside the non financial resident sectors. However, fiscal data provide information on trade credit for households’ unincorporated enterprises and non-profit institutions serving households. The amount of trade credit transactions realised between these two sub-sectors is estimated and gives rise to consolidation in the sector households .

In other sub-sectors, direct information is available to varying extents. It comes mainly from the balance sheets of the individual entities and not from groups’ balance sheets. Thus, the non-consolidated accounts provide a complete picture of the financial transactions, assets and liabilities of the institutional units classified under the same sector/sub-sector.

Conclusion

The data used for consolidation, namely the information on the counterpart sector for most of the operations, may enhance the quality of the financial accounts because when the counterpart operation is recorded in the same conditions as the operation itself, the line is automatically balanced and no further adjustment is required. However, this arithmetic truth does not preclude some concurrence of different sources for a single operation and some difficulties in the assessment of the best quality data. In cases where no information is available at all, neither directly nor from counterparts, the costs that may be incurred in the collection of the information may be very high and should be compared with the potential benefits.