A research article about Government Accounting Standard Board (GASB) topic 2450 – Cash Flow Statements; Cash Flows from Operating Activities standard. See attached, pages 6 &

NO. 063  SEPTEMBER 1989

Governmental Accounting Standards Series

Statement No. 9 of the Governmental Accounting

Standards Board

Reporting Cash Flows

of Proprietary and Nonexpendable Trust Funds

and Governmental Entities That Use Proprietary

Fund Accounting

Governmental Accounting Standards Board of the Financial Accounting Foundation

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The GASB website can be accessed at www.gasb.org.

i

Summary

This Statement establishes standards for cash flow reporting. It requires a statement

of cash flows (instead of a statement of changes in financial position) as part of a full set

of financial statements for all proprietary and nonexpendable trust funds and

governmental entities that use proprietary fund accounting. It exempts public employee

retirement systems and pension trust funds from the requirement to present either a

statement of cash flows or a statement of changes in financial position.

This Statement requires that a statement of cash flows classify cash receipts and

payments according to whether they stem from operating, noncapital financing, capital

and related financing, or investing activities, and it provides definitions of each category.

Governmental enterprises are encouraged to report cash flows from operating

activities directly by showing major classes of operating cash receipts and payments (the

direct method), although the indirect or reconciliation method may be used. If the direct

method is used, a reconciliation of operating income to net cash flow from operating

activities is required to be provided.

Information about investing, capital, and financing activities not resulting in cash

receipts or payments in the period is required to be provided separately.

This Statement is effective for annual financial statements for fiscal years beginning

after December 15, 1989. Restatement of financial statements for earlier years provided

for comparative purposes is encouraged but not required.

Unless otherwise specified, pronouncements of the GASB apply to financial reports of all

state and local governmental entities, including public benefit corporations and

authorities, public employee retirement systems, and governmental utilities, hospitals,

colleges, and universities. Paragraph 5 discusses the applicability of this Statement.

ii

Statement No. 9 of the Governmental Accounting

Standards Board

Reporting Cash Flows of Proprietary and

Nonexpendable Trust Funds and Governmental Entities

That Use Proprietary Fund Accounting

September 1989

Governmental Accounting Standards Board of the Financial Accounting Foundation

401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116

iii

Copyright © 1989 by Financial Accounting Foundation. All rights reserved. Content

copyrighted by Financial Accounting Foundation may not be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording, or otherwise, without the prior written permission of the

Financial Accounting Foundation.

iv

Statement No. 9 of the Governmental Accounting Standards Board

Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and

Governmental Entities That Use Proprietary Fund Accounting

September 1989

CONTENTS

Paragraph

Numbers

Introduction and Background Information …………………………………………………………….1–4

Scope of This Statement ……………………………………………………………………………………1

Background ………………………………………………………………………………………………….2–4

Standards of Governmental Accounting and Financial Reporting …………………………..5–37

Applicability of This Statement ………………………………………………………………………….5

Financial Reporting of Cash Flows……………………………………………………………………..6

Purpose of a Statement of Cash Flows ………………………………………………………………..7

Focus on Cash and Cash Equivalents …………………………………………………………….8–11

Gross and Net Cash Flows ………………………………………………………………………….12–14

Classification of Cash Receipts and Cash Payments ………………………………………15–28

Distinguishing between Capital and Noncapital Financing …………………………………29

Content and Form of a Statement of Cash Flows …………………………………………..30–36

Information about Noncash Investing, Capital, and Financing Activities ……………….37

Effective Date and Transition ………………………………………………………………………………..38

Appendix A: Basis for Conclusions …………………………………………………………………..39–74

Appendix B: Illustrative Statement of Cash Flows………………………………………………75–77

Appendix C: Codification Instructions ……………………………………………………………………78

1

Statement No. 9 of the Governmental Accounting Standards Board

Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and

Governmental Entities That Use Proprietary Fund Accounting

September 1989

INTRODUCTION AND BACKGROUND INFORMATION

Scope of This Statement

1. This Statement establishes standards for reporting cash flows of proprietary and

nonexpendable trust funds and governmental entities that use proprietary fund

accounting. 1

This Statement also eliminates the requirements for public employee

retirement systems (PERS) and pension trust funds to provide a statement of changes in

financial position. It supersedes the June 15, 1987 GASB Codification of Governmental

Accounting and Financial Reporting Standards Section 2200, ―Comprehensive Annual

Financial Report,‖ paragraph .106, and related requirements in that section, in Section

2600, ―Reporting Entity and Component Unit Presentation and Disclosure,‖ and in

Section Pe5, ―Pension Funds—Accounting.‖ 2

1

GASB Codification Section 1300, ―Fund Accounting,‖ paragraph .102b, states that proprietary fund types

―are used to account for a government’s ongoing organizations and activities that are similar to those often

found in the private sector (enterprise and internal service funds). All assets, liabilities, equities, revenues,

expenses, and transfers relating to the government’s business and quasi-business activities—where net

income and capital maintenance are measured—are accounted for through proprietary funds‖ (footnote

reference omitted). Also, as stated in Codification Section 2200, paragraph .106b(3), nonexpendable trust

funds are similar to proprietary funds and should be reported similarly. 2

Further references to the Codification are abbreviated. For example, Section 2200, paragraph .106, is

referred to as Cod. Sec. 2200.106.

2

Background

2. In November 1987, the Financial Accounting Standards Board (FASB) issued

Statement No. 95, Statement of Cash Flows. That Statement establishes standards for cash

flow reporting for all business enterprises. It supersedes Accounting Principles Board

(APB) Opinion No. 19, Reporting Changes in Financial Position, and requires a

statement of cash flows in place of a statement of changes in financial position as part of a

full set of financial statements.

3. FASB Statement 95 points out that since Opinion 19 was issued, cash flow

information has gained significance. Paragraph 13 of FASB Concepts Statement No. 5,

Recognition and Measurement in Financial Statements of Business Enterprises, states that

―a full set of financial statements for a period should show: . . . [c]ash flows during the

period.‖ Paragraph 78 of GASB Concepts Statement No. 1, Objectives of Financial

Reporting, also focuses on the need for, and importance of, cash flow information (Cod.

Sec. 100.178b). It states that an objective of financial reporting is to ―provide information

about how the governmental entity financed its activities and met its cash requirements.‖

4. To provide guidance on cash flow reporting by proprietary and nonexpendable trust

funds and governmental entities that use proprietary fund accounting, the Board

concluded that the provisions of FASB Statement 95 could be adapted to reflect more

closely the nature of governmental operations. The major differences between this

Statement and FASB Statement 95 are that (a) four categories are used for classifying

cash transactions instead of the three required by FASB Statement 95 and (b) the

―operating‖ category is more narrowly focused. The categories were redefined

accordingly.

3

STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL

REPORTING

Applicability of This Statement

5. The provisions of this Statement are applicable to proprietary funds, nonexpendable

trust funds, and governmental entities that use proprietary fund accounting, 3

including

public benefit corporations and authorities, governmental utilities, and governmental

hospitals. 4

PERS and pension trust funds are exempt from the requirement to present a

statement of cash flows. In addition, PERS that report in accordance with NCGA

Statement 6, Pension Accounting and Financial Reporting: Public Employee Retirement

Systems and State and Local Government Employers, and pension trust funds are not

required to present a statement of changes in financial position. However, PERS and

pension trust funds are not precluded from presenting a statement of cash flows if the

information provided is considered useful.

Financial Reporting of Cash Flows

6. Governmental enterprises should present a statement of cash flows for each period

for which results of operations are reported.

Purpose of a Statement of Cash Flows

7. The primary purpose of a statement of cash flows is to provide relevant information

about the cash receipts and cash payments of an entity during a period. When used with

related disclosures and information in the other financial statements, the information a

statement of cash flows provides should help financial report users assess (a) an entity’s

ability to generate future net cash flows, (b) its ability to meet its obligations as they come

3

Unless otherwise noted, future references in this Statement to affected funds and entities will simply be to

―governmental enterprises.‖ 4

Some governmental colleges and universities report their transactions and balances within the

governmental model using National Council on Governmental Accounting (NCGA) Statement 1,

Governmental Accounting and Financial Reporting Principles. This Statement applies to the proprietary and

nonexpendable trust funds of those governmental colleges and universities. However, this Statement is not

required to be applied to those governmental colleges and universities that follow the specialized industry

accounting and reporting principles contained in the American Institute of Certified Public Accountants

(AICPA) Industry Audit Guide, Audits of Colleges and Universities (1975).

4

due, (c) its needs for external financing, (d) the reasons for differences between operating

income (or net income if operating income is not separately identified on the operating

statement) and associated cash receipts and payments, and (e) the effects on the entity’s

financial position of both its cash and its noncash investing, capital, and financing

transactions during the period. To do this, a statement of cash flows should report the cash

effects during the reported period of an entity’s operations, its noncapital financing

transactions, its capital and related financing transactions, and its investing transactions.

Related information should report the investing, capital, and financing transactions that

affect an entity’s financial position but do not directly affect cash flows during the period.

A reconciliation of operating income (or net income if operating income is not separately

identified on the operating statement) to net cash flow from operating activities also

should be provided. This reconciliation generally will provide information about the net

effects of operating transactions and other events that affect operating income and

operating cash flows in different periods.

Focus on Cash and Cash Equivalents

8. A statement of cash flows should explain the change during the period in cash 5

and

cash equivalents regardless of whether there are restrictions on their use. The statement

should use a descriptive term such as cash or cash and cash equivalents rather than the

term funds, which has several different meanings in governmental accounting. The total

amounts of cash and cash equivalents at the beginning and end of the period shown in the

statement of cash flows should be easily traceable to similarly titled line items or subtotals

shown in the statements of financial position as of those dates.

9. For purposes of this Statement, cash equivalents are defined as short-term, highly

liquid investments that are both

5

Consistent with common usage, cash includes not only currency on hand, but also demand deposits with

banks or other financial institutions. Cash also includes deposits in other kinds of accounts or cash

management pools that have the general characteristics of demand deposit accounts in that the governmental

enterprise may deposit additional cash at any time and also effectively may withdraw cash at any time

without prior notice or penalty.

5

a. Readily convertible to known amounts of cash.

b. So near their maturity that they present insignificant risk of changes in value because

of changes in interest rates.

Generally, only investments with original maturities 6

of three months or less meet this

definition.

10. Examples of items commonly considered to be cash equivalents are Treasury bills,

commercial paper, certificates of deposit, money market funds, and cash management

pools. Cash purchases and sales of those types of investments generally are part of the

entity’s cash management activities rather than part of its operating, capital, investing, and

financing activities, and details of those transactions should not be reported in a statement

of cash flows.

11. Not all investments that qualify are required to be treated as cash equivalents. An

entity should establish a policy concerning which short-term, highly liquid investments

(that satisfy the definition of cash equivalents in paragraph 9) it will treat as cash

equivalents. An entity should disclose its policy for determining which of those items are

treated as cash equivalents. Any change in that policy is a change in accounting principle

that should be reported by restating financial statements for earlier years presented for

comparative purposes.

Gross and Net Cash Flows

12. Generally, information about the gross amounts of cash receipts and cash payments

during a period is more relevant than information about the net amount of cash receipts

and payments. However, the net amount of related receipts and payments provides

sufficient information not only for cash equivalents, as noted in paragraph 10, but also for

certain other classes of cash flows specified in paragraphs 13, 14, and 32.

6

Original maturity means the original maturity to the entity holding the investment. For example, both a

three-month U.S. Treasury bill and a three-year Treasury note purchased three months from maturity qualify

as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent

when its remaining term is three months.

6

13. Items that qualify for net reporting because their turnover is quick, their amounts are

large, and their maturities are short are cash receipts and payments pertaining to (a)

investments (other than cash equivalents), (b) loans receivable, and (c) debt, provided that

the original maturity of the asset or liability is three months or less. 7

14. In addition, in certain circumstances governmental enterprises may report net the

purchases and sales of their highly liquid investments rather than report the gross

amounts. Net reporting is allowed if (a) during the period, substantially all of the

governmental enterprise’s assets were highly liquid investments (for example, marketable

securities and other assets for which a market is readily available) and (b) the

governmental enterprise had little or no debt, based on average debt outstanding during

the period, in relation to average total assets.

Classification of Cash Receipts and Cash Payments

15. A statement of cash flows should classify cash receipts and cash payments as

resulting from operating, noncapital financing, capital and related financing, or investing

activities.

Cash Flows from Operating Activities

16. Operating activities generally result from providing services and producing and

delivering goods, and include all transactions and other events that are not defined as

capital and related financing, noncapital financing, or investing activities. Cash flows

from operating activities generally are the cash effects of transactions and other events

that enter into the determination of operating income. 8

7

For this purpose, amounts due on demand are considered to have maturities of three months or less.

Examples of items that could be reported ―net‖ based on the criteria in paragraph 13 are most repurchase

agreements (assuming the entity chooses not to include them as cash equivalents) and loans to and from

other funds to cover temporary (three months or less) cash needs. 8

Although operating income is not defined in authoritative governmental accounting literature, the term has

become widely used. A nonauthoritative illustration of the calculation of operating income (operating

revenues less operating expenses) is provided in Cod. Sec. 2200.606.

7

17. Cash inflows from operating activities include

a. Cash inflows from sales of goods or services, including receipts from collection of

accounts receivable and both short- and long-term notes receivable from customers

arising from those sales.

b. Cash receipts from quasi-external operating transactions with other funds.

c. Cash receipts from grants for specific activities that are considered to be operating

activities of the grantor government. (A grant arrangement of this type is essentially

the same as a contract for services.)

d. Cash receipts from other funds for reimbursement of operating transactions.

e. All other cash receipts that do not result from transactions defined as capital and

related financing, noncapital financing, or investing activities.

18. Cash outflows for operating activities include

a. Cash payments to acquire materials for providing services and manufacturing goods

for resale, including principal payments on accounts payable and both short- and

long-term notes payable to suppliers for those materials or goods.

b. Cash payments to other suppliers for other goods or services.

c. Cash payments to employees for services.

d. Cash payments for grants to other governments or organizations for specific activities

that are considered to be operating activities of the grantor government.

e. Cash payments for taxes, duties, fines, and other fees or penalties.

f. Cash payments for quasi-external operating transactions with other funds, including

payments in lieu of taxes.

g. All other cash payments that do not result from transactions defined as capital and

related financing, noncapital financing, or investing activities.

19. Cash flows from operating activities also include transactions of certain loan

programs. Even though loan activities are usually classified as investing activities, certain

loan programs are not intended to be investments, but are undertaken instead to fulfill a

governmental responsibility. These ―program loans‖ are made and collected as part of a

governmental program, for example, low-income housing mortgages or student loans. For

cash flow reporting purposes, these loan activities are the operating activities of the

governmental enterprise; therefore, the related cash flows should be classified as operating

activities. All loans made and collected (including interest) should be considered

operating cash outflows and inflows, respectively. Any proceeds from bonds issued to

finance the loan program and subsequent debt service payments (principal and interest)

should be classified as noncapital financing activities.

8

Cash Flows from Noncapital Financing Activities

20. Noncapital financing activities include borrowing money for purposes other than to

acquire, construct, or improve capital assets and repaying those amounts borrowed,

including interest. This category includes proceeds from all borrowings (such as revenue

anticipation notes) not clearly attributable to acquisition, construction, or improvement of

capital assets, regardless of the form of the borrowing. Also included are certain other

interfund and intergovernmental receipts and payments.

21. Cash inflows from noncapital financing activities include

a. Proceeds from issuing bonds, notes, and other short- or long-term borrowing not

clearly attributable to acquisition, construction, or improvement of capital assets.

b. Cash receipts from grants or subsidies 9

except (1) those specifically restricted for

capital purposes (paragraph 24b) and (2) those for specific activities that are

considered to be ope

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