3 Accounting
3.9 Interfund Activities
3.9.6 Internal Service Funds
3.9.6.10 The use of internal service funds is not required. However, governments are permitted to use internal service funds for activities that provide goods and services to other funds or departments or other governments on a cost reimbursement basis. The use of an internal service fund is only appropriate if the sponsoring government is the predominant user of the services. Otherwise, an enterprise fund should be used.
3.9.6.20 For counties and cities (with population over 8,000), equipment rental funds are legally mandated for operating county road and city street departments by Chapter 36.33A RCW and RCW 35.21.088, respectively. This can be set up as a managerial fund (see BARS 3.1.12, Managerial Funds) or as a separately reported internal service fund (see BARS 3.9.7, Equipment Rental and Revolving Fund).
3.9.6.30 The internal service fund is used as a way to identify the costs of providing specific services and equitably allocate those costs to benefiting funds. Internal service funds should operate on a cost reimbursement basis (without generating a profit).
Internal service funds are set up specifically to provide services to other funds. Therefore, this activity should be accounted for as interfund services provided/used. The internal service fund should record a charge for service revenue (BARS code 348.00.00 Internal Service Funds Sales and Services) and the other funds should report a functional expenditure. Revenue collected from an external party should not be coded to BARS code 348.00.00. Instead, the internal service fund should use one of the other charge for service revenue codes in the 340 series. The specific code depends on the service provided.
3.9.6.40 Prior to establishing a new fund, a review of existing state laws and regulations should be conducted to ensure the legality of using this fund classification. Careful consideration must also be given to defining the specific activity to include in the fund, the specific cost objectives associated with providing the service, development of pricing rates and budgetary concerns.
Establishment
3.9.6.50 The internal service fund is usually accomplished by contributions and/or transfers of cash or capital assets from other funds. When nonmonetary assets are contributed or transferred from other funds, it should be recorded as a change in location and/or custodian. There would be no accounting entry since cash basis governments do not report capital assets. See BARS 3.9.2, Property Transfers for additional guidance.
Rates
3.9.6.80 Rates charged for use of internal service equipment facilities should normally include three components:
a. Current cost of maintenance and operation,
b. A surcharge for equipment replacement, if applicable
3.9.6.90 Rates can be developed for individual assets or similar groups of assets. They can also be billed as a single rate or separately. Composite rates (single rates that apply to dissimilar assets) should be avoided as they tend to lead to overcharges or undercharges.
All actual costs associated with the operation of the internal service fund should be included when determining the rate structure for equipment. Allocation of the costs should be made on an equitable basis.
3.9.6.100 It is not necessary to record the individual components of the rate. However, it is important to have a system in place that separates charges for replacing equipment from the other components. Most federal grants allow only actual costs to be submitted for reimbursement. Surcharges for equipment replacement are an estimate and not allowable under the Uniform Guidance, 2 CFR 200, Subpart E – Cost Principles. Inclusion of surcharges for equipment replacement in federal reimbursement requests could lead to questioned costs.
3.9.6.110 Rates should be re-evaluated on a yearly basis and adjusted when needed. This would include review of the inflation factor as well as operational costs. Governments should avoid locking in rates contractually with departments over long periods as they will need to be periodically adjusted to ensure adequate amounts are charged to recoup costs and plan for the replacement of equipment.
Deficiencies in revenues should be made up from rate increases, or transfers from the general fund or funds of the departments using the services. Excess revenue should be allocated back to departments that are overcharged. Governments should ensure practices are equitable to prevent one fund benefitting another inappropriately (RCW 43.09.210).
Management information
3.9.6.120 Management must maintain records which will identify all revenues and costs associated with an asset or asset group.
Revenue assets are those facilities or items of equipment, which are directly rented to users or operated directly for a user. Examples include motor pool vehicles, computer mainframes and terminals, and telephone systems.
Dedicated revenue assets are those which have a single fund or department as their primary user, such as police cars or election equipment.
3.9.6.130 A separate record of costs and revenues should be maintained for each internal service fund revenue asset, but group asset records can be acceptable. This requirement does not apply to service equipment, such as repair shops or fuel pumps. The record for each revenue asset should include the following items:
1. Type of asset and a cross reference to the individual capital asset record (see general capital asset tracking requirements in BARS 3.3.8, Capital Assets Management); identification of primary user if it is dedicated, or whether it is a pool asset.
2. A periodic summary (at least annually) of all operating expenses, including any special operator costs.
3. Periodic indirect expenses.
4. Periodic rental income, service charges, or user fees.
5. Periodic calculation of net income or loss.
6. Annual summary of 2-5 above.
7. Cumulative net income or loss of the capital asset.
This record should supplement the individual capital asset record.