Internal Service Funds

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 by the generally accepted accounting principles (GAAP). However, GAAP permits internal service funds to be used 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). 

a. Current cost of maintenance and operation, 
b. A reasonable charge for depreciation,
c. A surcharge for equipment replacement. Replacement cost is the amount that is anticipated to replace the existing asset above the cost being recovered through depreciation.

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 on the asset(s) profit and loss record. 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 from another (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 3.3.9, Capital Asset Management System Requirements); 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 depreciation expense and 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.

Replacement and disposal of revenue assets

3.9.6.140 Accounting for a replacement or disposal depends on the transaction that takes place.

3.9.6.150 If a revenue asset is traded-in for a similar asset, the gain on the old asset should be accounted for by reducing the cost of the new asset. However, if the trade-in results in a loss on the old asset, the loss should be recognized in the current period. For disposal of revenue assets (other than a trade-in) outside of the government, gains and losses should be recognized in the current period. If an asset is transferred to/from another fund, the transaction should be recorded at book value with no gain or loss recognized.

3.9.6.160 The individual asset records should reflect the same information as the accounting records.