BARS Account Exports
In this section, governments can access a report providing information on the allowability of BARS codes in fund types as well as export a chart of accounts specific to a government type.

BARS Codes to Fund Type
BARS codes may be restricted for use in the annual report filing system. The following matrix “Codes to Funds” identifies which fund group(s) that each active BARS code may be reported in.

Download FY2025 Codes to Funds here. Codes are as of December 1, 2025.

Note: It is recommended to use this matrix in conjunction with the government specific BARS Account Export provided below.

BARS Account Export
Download a government specific BARS Chart of Accounts in the export box at the bottom of this page.

Your annual report requires seven digits for all account codes however, their display in the chart of accounts export varies. The expenditure or expense accounts are presented in the export without object codes. Object codes will need to be added to the BARS Code to complete the required seven digits for the annual report. Additional details about object codes are available in the BARS Manual 1.4, Object Codes. Reporting at the sub object level is not required.

How to use the BARS Account Export

Select a government type
The government type selection will limit the BARS accounts that are applicable to the selected government type. If all is selected, the export will include BARS accounts for all government types.

Select basis of accounting
The basis of accounting selection will limit the BARS accounts that are applicable to the basis of accounting selected (GAAP or Cash). If all is selected, the export will include all the BARS codes regardless of their applicability to a specific basis.

Select export type
The Excel option provides a spreadsheet which you can format.
The PDF is formatted to highlight the different categories of account codes and for printing. For display purposes, the account codes contain decimal points which should be excluded in your annual report.

Select a reporting level
Above and Prescribed option includes all the accounts, including the accounts in which other codes are rolled up into for category presentation. These above prescribed codes are not valid for reporting; however they provide detailed information on the category of the codes. This listing also provides the Prescribed accounts, which are the required accounts for annual report filing.
The Prescribed option includes only the accounts which are the valid BARS account codes for annual report filing.

1 Charts of Accounts

1.1.2 Account Structure

1.1.2.10 All BARS codes are required to be seven-digits for reporting purposes on the Schedule 01. Local governments may include additional digits within their internal account structure, such as fund numbers and added digits for tracking details. If a different system of numbers is used for internal accounting, it must contain equivalent detail throughout the budget, accounting, and reporting process.

See BARS 3.1.7, Fund Accounting and Fund Types for the structure of fund numbers, which are separate from the required structure of BARS codes.

1.1.2.20 The seven-digit BARS code structure has the following components:

First digit

3 (three) represents beginning balances, revenues, and other increases. 

5 (five) represents ending balances, expenditures/expenses, and other decreases. 

Second and third digits

Revenues – represents the source (origin or originating category) of revenues. These digits are always prescribed and required for reporting on the Schedule 01.

Expenditures – represents the different functions and activities for which the expenditures/other decreases are supporting.

Fourth and fifth digits

Revenues – represents further details for specific types of revenues within a particular source.

Expenditures – represents further details for specific elements and sub-elements of activities related to the particular function and activity.

Sixth and seventh digits 

Revenues – these digits are generally not defined and are represented as zeros.  When these digits are represented as zeros, they are available for customization by the local government. However, there are exceptions to this rule. The BARS codes within the 330 series prescribe all seven digits and cannot be customized. Local governments should be aware that as the BARS manual is updated, these digits may be assigned for specific purposes.

Expenditures – represents the object code, which identifies the specific type of items that support the activity or function. For additional information on object codes, please see BARS 1.4, Object Codes. 

1.1.2.30 The tables below provide an overview of the major categories of BARS codes. For the complete listing of all BARS codes with their full definitions, go to BARS Account Export. 

Beginning and Ending Cash and Investments

300		Beginning Cash and Investments
	308	Beginning Cash and Investments
500		Ending Cash and Investments
	508	Ending Cash and Investments

Major categories of revenues by source 

310		Taxes
	311	Property Tax
	313	Retail Sales and Use Taxes
	316	Business and Occupation Taxes
	317	Excise Taxes in Lieu of Property Tax
	318	Other Taxes
320		Licenses and Permits
	321	Business Licenses and Permits
	322	Non-Business Licenses and Permits
330		Intergovernmental Revenues
	331	Federal Direct Awards
	332	Federal Other Award Revenues
	333	Federal Indirect Awards
	334	State Grants, Awards, and Other Contributions
	335-336	State Shared Revenues, Entitlements and Impact Payments
	337	Local Awards, Entitlements, Tribal Government Distributions, and Other Payments
340		Charges for Goods and Services
	341	General Government
	342	Public Safety
	343	Utilities
	344	Transportation
	345	Natural and Economic Environment
	346	Social Services
	347	Culture and Recreation Fees
	348	Internal Service Funds Sales and Services
350		Fines and Penalties
	351	Superior Court - Felony/Misdemeanor Penalties
	352	Civil Penalties
	353	Civil Infraction Penalties
	354	Civil Parking Infraction Penalties
	355	Criminal Traffic Misdemeanor Fines
	356	Criminal Non-Traffic Fines
	357	Criminal Costs
	359	Non-Court Fines and Penalties
360		Miscellaneous Revenues
	361	Interest and Other Earnings
	362	Rents and Leases
	367	Contributions and Donations from Nongovernmental Sources
	368	Special Assessments
	369	Other Miscellaneous Revenues

Other Increases and Financing Sources

380		Other Increases in Fund Resources
	381	Interfund Loan Receipts
	382	Deposits, Retainage and Other Collections
	385	Special or Extraordinary Items
	386	Court Remittances
	388	Other Increases in Fund Balance
	389	Custodial Activities
390		Other Financing Sources
	391	Debt Issued
	392	Premiums on Bonds Issued
	393	Refunding Long-Term Debt Issued
	395	Disposition of Capital Assets
	397	Transfers-In
	398	Insurance Recoveries

Major functions of expenditures

510		General Government
	511	Legislative Activities
	512	Judicial Activities
	513	Executive Activities
	514	Financial, Recording and Election Activities
	515	Legal Services
	517	Employee Benefit Programs
	518	Centralized/General Services
	519	Risk Management Services
520		Public Safety
	521	Law Enforcement Activities
	522	Fire and Emergency Medical Activities
	523	Detention/Correction Activities
	524	Protective Inspection Services
	525	Disaster Services
	527	Juvenile Services
	528	Dispatch Services
530		Utilities
	531	Storm Drainage Utilities
	532	Television/Cable/Internet Utilities
	533	Electric/Gas Utilities
	534	Water Utilities
	535	Sewer/Reclaimed Water Utilities
	536	Cemetery
	537	Solid Waste Utilities
	538	Combined Utilities
	539	Irrigation/Reclamation Utilities
540		Transportation
	542	Roads/Streets Ordinary Maintenance
	543	Roads/Streets General Administration and Overhead
	544	Roads/Streets Operations
	545	Roads/Streets Extraordinary Operations
	546	Airports and Ports
	547	Transit, Railroads and Other Transportation Systems
	548	Public Works – Centralized Services
550		Natural and Economic Environment
	551	Public Housing Services
	552	Employment Opportunity
	553	Conservation
	554	Environmental Services
	557	Community Services
	558	Community Planning and Economic Development
	559	Property Development
560		Social Services
	561	Hospitals, Assisted Living and Convalescent Facilities
	562	Public Health Services
	563	Coroner/Medical Examiner
	564	Mental Health Services
	565	Welfare/Veterans Services/Services for Disabled/Homeless Services/Domestic Violence
	566	Chemical Dependency Services
	567	Children Services
	568	Developmental Disabilities Services
	569	Aging and Disability Services
570		Culture and Recreation
	571	Educational and Recreational Activities
	572	Libraries
	573	Cultural and Community Events
	575	Cultural and Recreational Facilities
	576	Park Facilities

Other Decreases and Financing Uses

580		Other Decreases in Fund Resources
	581	Interfund Loan Disbursements
	582	Deposits, Retainage and Other Remittances
	585	Special or Extraordinary Items
	588	Other Decreases in Fund Balance
	589	Custodial Activities
590		Debt Expenditures, Capital Outlays, and Other Financing Uses
	591	Debt Repayment
	592	Interest and Other Debt Service Costs
	593	Advance Refunding Escrow
	594	Capital Expenditures
	595	Roads/Streets and Related Infrastructure: Improvements and New Construction Projects
	596	Issuance Discount on Long-Term Debt
	597	Transfers-Out
	599	Payments for Refunded Debt

1 Charts of Accounts

1.4 Object Codes

00 Depreciation, Amortization, Other Decreases in Fund Resources and Transfers-Out

Use this category with the accounts 501, 581, 582, 585, 586, 588, 589, and 597.

10 Salaries and Wages

Use this object code for the gross amounts paid for personal services rendered by employees in accordance with the rates, hours, terms and conditions authorized by law or stated in employment contracts. This category also includes overtime, hazardous duty or other compensation construed to be salaries and wages. Governments may subdivide this account as necessary for detailed local purpose reporting (i.e., regular pay, overtime pay, sick pay (employee related), sick pay (non-employee related), vacation pay, shift differential, and other taxable compensation).

Personal services do not include fees and out-of-pocket expenditures for professional or consultant services performed on assignments. Such services are properly classified as object code 40.

20 Personnel Benefits

Use this object code for the employer’s share of benefits provided to employees, in addition to compensation, that are part of the conditions of current or past employment. Governments may subdivide this account as needed for detailed local purpose reporting (i.e., health/vision/dental insurance, unemployment compensation payments and/or premiums, Social Security, Medicare taxes, uniforms, pension, and workers' compensation).

Payments for pay-as-you-go health and welfare plans, or pension/OPEB plans would be coded to personnel benefits. Payments to fund either a self-insurance fund for health and welfare type benefits or a pension/OPEB fund would also be coded to personnel benefits, then subsequent payment from the self-insurance funds and non-fiduciary pension/OPEB funds for all claims would use object code 40 for the payments.

30 Supplies for Consumption and Resale

Use this object code for:

• items purchased for consumption and use by the government:
  • Examples: office supplies, forms, agricultural supplies, chemicals, laboratory supplies, cleaning supplies, clothing, construction materials, drugs, electrical supplies, feed for animals, household supplies, lubricants, medicines, painting and plumbing supplies, books, publications, etc.;
  • fuel used to generate power, heating, and operate engines and vehicles (e.g., coal, diesel fuel, gasoline, oil, propane gas, wood, etc.);
  • small tools and minor equipment
• items purchased for resale – (i.e., inventory):
  • Examples: automotive repair parts, grave markers and liners, central store merchandise, maps, code books, concession supplies, fuel, trees, books and other literary materials, office supplies, forms, agricultural supplies, chemicals, laboratory supplies, cleaning supplies, clothing, construction materials, drugs, electrical supplies, feed for animals, household supplies, lubricants, medicines, painting and plumbing supplies, books, publications, etc.; 
  • Note: power, gas, water and waste disposal services purchased for resale only to the government’s customer – for the government’s own use, use object code 40.

40 Services and Pass-Through Payments

Use this object code for professional and technical services which are provided by other governments (federal, state, local), other funds, or by private entities as well as for pass-through payments as described below.

Services include but aren’t limited to the following examples:

• professional services (e.g., accounting, auditing, advertising, computer services, medical, dental and hospital, management consulting, custodial, messenger, testing, monitoring, cleaning, engineering, architectural, legal, investment services, etc.);
• communication (e.g., postage, internet, telephone, facsimile, shipping, etc.);
• travel (e.g., mileage, lodging, meals, etc.);
• taxes (e.g., sales and use, B&O tax, etc.) and operating assessments (i.e., payments to other governments or funds based on levies against property or income of the government or a fund);
• permits, licenses, accreditation, certification and other fees which are necessary for operations paid to the federal, state or local governments (e.g., survey fees, laboratory accreditation fees, disposal fees, discharge permits, biosolid permits, FERC licenses, etc.);
• short-term lease and subscription payments (GAAP entities should use object 60 for long-term leases and SBITAs; cash basis entities should use object 70 for payments on long-term leases and SBITAs);
• insurance payments: e.g., liability, theft, bonds, casualty, etc.; some payments may use object 20 for insurance applicable to personnel benefits (see object code 20 for more information);
• utility services: e.g., water, sewer, gas, electricity, waste disposal, television, etc. that are used by the government itself. Use object 30 for power, gas or water purchased for resale (see object code 30 for more information);
• contracted repairs and maintenance (use object 60 for capital asset construction contracts);
• other (e.g., court costs, investigation, judgments, damages, dues, subscriptions, memberships, registrations, information and credit services, laundry and sanitation services, filing, recording, witness fees, printing, binding, tuition, etc.).

Pass-through payments include eligible intergovernmental  payments, contributions and grants that the government has received from federal, state, or other local governments and are passed through to other entities.

60 Capital Outlays

Use this object code for expenditures related to the purchase or construction of assets considered capital according to the government’s capitalization threshold policy. This object code should be used only with accounts 594 and 595.

Include expenditures related to acquisition of, rights to, or additions to capital assets, including incidental costs such as legal, appraisal and brokerage fees, land preparation and demolishing buildings, fixtures and delivery costs. This category includes purchases and construction of major capital assets which are purchased or constructed by the external party. Assets constructed or fabricated by the municipality should be classified under other object codes; i.e., wages under object code 10, materials, small tools and minor equipment under object code 30, etc. Include:

• land and related other land improvements (e.g., easements, site improvements such as excavation, fill, grading, utility installation, removal, relocation or reconstruction of property, retaining walls, fencing, landscaping, land acquisition costs and related expenditures, intangible rights to land, etc.);
• acquisition, construction, and improvements of buildings (e.g., administrative and office buildings, garage, shops, firehouses, jails, libraries, zoos, park buildings, coastal and riverine structures);
• infrastructure and other tangible or intangible assets (e.g., alleys, athletic fields, water/sewer systems, fuel depots, dikes, levees, signs and signals, landscape and vegetation, artwork, computer software, etc.);
• machinery and equipment (e.g., vehicles, police dogs and horses, computer hardware, etc.);
• assets acquired under executory conditional sales contracts (RCW 39.30.010).

70 Debt Service – Principal

Use this object code with codes 591, 593, 594 (cash basis only), 596 and 599. Include general obligation, revenue, special assessment bonds, long-term leases/SBITA, installment purchases, anticipation and other notes, anticipation warrants, contracts, intergovernmental loans, other debt, LOCAL program payments, etc.

80 Debt Service – Interest and Issuance Costs

Use this object code with codes 592, 593, 594 (cash basis only) and 599. Include interest on short and long-term external debt, interest on interfund debt, interests on debt to joint ventures and affiliates, LID assessments, interest on intergovernmental debt, leases, interest paid on overdue taxes (RCW 84.69.070), debt issuance and other debt service costs.

1 Charts of Accounts

1.2 Optional - General Ledger Accounts

1.2.10 The specific account numbers contained here are not prescribed, with an exception for selected liabilities accounts which are required to be reported on the Schedule of Liabilities (Schedule 09). Use of general ledger accounts in cash basis governments is optional. This general ledger has been carefully designed to meet several needs, generally the highest need being an accounting systems requirement for a full chart of accounts.

1.2.20 First, the accounts provide for identification of assets, deferred outflows, liabilities, deferred inflows and fund balance/net position (beginning and ending cash and investment balances for cash governments) that any local government fund might acquire. Throughout the general ledger, the fourth or fifth and subsequent digits have been left for local governments to use in establishing more detailed breakdowns where needed.

1.2.30 Second, the general ledger has been designed to permit logical summarization of the detailed accounts at various levels, such as rolling up cash and investment totals separately from liability totals.

1.2.40 Third, the comprehensiveness of the general ledger combined with the uniform summarization discussed above is designed to make the preparation balance sheets a simple matter of extracting the balances at the same level for all the funds of a government. The headings on the attached chart identify which digits to sort or summarize by for reporting purposes. The presentation of a balance sheet is structured in similar manner as the general ledger accounts as shown in the attached chart.

1.2.50 The following excel file provides the list of optional general ledger accounts. The “GL Accounts” tab provides account titles and their corresponding account number. The “GL Accts w Descriptions” tab provides account titles and their corresponding account number along with account descriptions.

Download the excel workbook here: General Ledger Accounts

2 Budgeting

2.4 Budget Compliance

2.4.1 Introduction

2.4.1.10 A budget is a legal document that forecasts the financial resources of a government and authorizes the spending of those resources for a fiscal period. At a minimum, local governments’ budget must meet the requirements of Washington state law and the State Auditor’s Office. The SAO does not prescribe how to budget or what a budget should look like. The adopted budget should be of sufficient detail to be meaningful and meet the intention of the law. The SAO considers budgets showing revenues and expenditures at the legal fund level to be the minimum acceptable level of detail.

2.4.1.20 Budgeting is more than just an activity to satisfy state law. It is a sophisticated process of strategic planning, communication and policy development resulting in a detailed plan of operations for allocating and monitoring the use of limited resources among various competing demands. Teaching how to budget is outside the scope of the BARS. However, there are many educational resources available to local governments, such as the Municipal Research and Services Center (mrsc.org) and the Government Finance Officers Association (gfoa.org).

2.4.1.30 Glossary of budgetary terms:

Annual/biennial appropriated budget – A fixed budget adopted for the government’s fiscal period. The appropriated budget was traditionally used to determine a government’s property tax levy, and a ceiling on expenditures was made absolute so that the expenditures of a government unit would not exceed its revenues. This budget was also historically a balanced budget, estimated revenues equaling appropriations. The appropriated budget is still used to set tax levies and some budget statutes still require balanced budgets, but it is more generally used to authorize a specific amount of expenditures regardless of whether estimated resources meet or exceed that amount. Appropriated budgets are required by statute in cities (Chapter 35.32A RCW, Chapter 35.33 RCW and Chapter 35A.33 RCW), counties (Chapter 36.40 RCW), and most other local governments in Washington State. These budgets are also called legal budgets, adopted budgets, or formal budgets. The appropriated budgets should be adopted by ordinance or resolution.

Appropriation – The legal spending level authorized by a budget ordinance or resolution. Spending should not exceed this level without prior approval of the governing body.

Capital improvement budget – Consists of two elements: the annual/biennial portion of capital projects and annual/biennial appropriations for the purchase, construction or replacement of major fixed assets in the current fiscal period.

Comprehensive budget – A government-wide budget that includes all resources the government expects and everything it intends to spend or encumber during a fiscal period. The comprehensive budget contains annual/biennial appropriated budgets, the annual/biennial portion of continuing appropriations such as the capital improvement projects, debt amortization schedules, and grant projects, flexible budgets and all non-budgeted funds.

Continuing appropriation – A fixed budget which authorizes expenditures for a fiscal period that differs from the government’s fiscal year, such as capital projects, debt issues, grant awards, and other service projects. These expenditures require an ordinance or resolution to authorize the project, establish the assessment roll, adopt the debt amortization schedule, or accept the grant award. Such ordinances or resolutions set an absolute maximum or ceiling on the expenditures, but the time period for incurring expenditures does not coincide with the government’s fiscal year; it may even cover several years. The major difference between annual/biennial appropriated budgets and continuing appropriations is that the latter do not lapse at fiscal period end; this implies that no legislative action is required to amend the annual/biennial portion of a continuing appropriation, unless the total authorized expenditures would exceed the entire appropriation.

Encumbrances – Commitments related to unperformed (executory) contracts for goods or services should be utilized to the extent necessary to assure effective budgetary control and to facilitate cash planning. Encumbrances outstanding at year end represent the estimated amount of expenditures ultimately to result if unperformed contracts in process are completed; they do not constitute expenditures or liabilities.

Final amended budget – The original budget adjusted by all reserves, transfers, allocations, supplemental appropriations, and other legally authorized legislative and executive changes applicable to the fiscal year, whenever signed into law or otherwise legally authorized.

Fixed budget – Those budgets which set an absolute maximum or ceiling on the expenditures of a particular fund, department, or other specific category. A fixed budget can be either an annual/biennial appropriated budget or a continuing appropriation. Fixed budgets must be adopted by ordinance or resolution, either for the government’s fiscal period or at the outset of a service project, debt issue, grant award, or capital project.

Flexible budgets – Are usually regarded as managerial tools, which do not set a ceiling on expenses or expenditures but establish a plan for them at various levels of service. They are especially appropriate for the day-to-day operations of a public utility where it is essential to plan fluctuations in the demand for services and where revenues will automatically increase with demand, so that a balanced budget does not depend on establishing a ceiling for expenses.

Operating budget – Presents the estimated expenditures and available resources necessary to provide the services for which the government was created. An operating budget will contain flexible budgets and fixed budgets; the fixed budgets will include annual/biennial appropriations for services and the annual/biennial portion of continuing appropriations for debt service and for service projects.

Original budget – The first complete appropriated budget. The original budget may be adjusted by reserves, transfers, allocations, supplemental appropriations, and other legally authorized legislative and executive changes before the beginning of the fiscal year. The original budget should also include actual appropriation amounts automatically carried over from prior years by law.

Working capital budget – Combines flexible and fixed budget elements in one document for enterprise and internal service funds. Current operations are flexibly budgeted based on the estimated level of services to be provided and long-range sources and uses of assets are controlled by annual/biennial appropriations and continuing appropriations.

2 Budgeting

2.4 Budget Compliance

2.4.3 Budget Adoption and Amendments

2.4.3.10 All taxing districts must file certified levies and budgets with the county per RCW 84.52.020. All taxing districts are required to hold a public hearing on the proposed levy and budget (excluding capital, enterprise, and special-assessment funds) and adopt their levy by ordinance or resolution per RCW 84.55.120.

2.4.3.20 Additional specific requirements for local governments that are required to expend within their budget are as follows:

• Air Pollution Control Authorities (RCW 70A.15.1590). The budget year of each activated authority is July 1st to June 30th. On or before the fourth Monday in June of each year, the activated authority must adopt a budget sufficient to carry out the provisions of all applicable ordinances, resolutions, and local regulations related to the reduction, prevention, and control of air pollution.

 

• Cities over 300,000 in population (Chapter 35.32A RCW). No later than 90 days prior to the beginning fiscal year, the mayor must submit the proposed budget to the city council who may accept or revise the budget. A summary of the proposed budget must be advertised in the official city newspaper at least once. Public hearings must be scheduled on two or more days, and the scheduled hearings must be published in the city official newspaper and provided to general news media. No later than 30 days prior to the beginning of the fiscal year, the city council must adopt an ordinance approving the budget submitted by the mayor. The detail of the budget is specified by the state statute, and in no case can the adopted budget expenditure allowances exceed total estimated revenues unless accompanied by proposed legislation to raise an equivalent amount of additional revenue. The detail of the budget is specified by the state statute.

 

• Cities under 300,000 in population (Chapter 35.33 RCW). At least 60 days prior to the beginning of the fiscal year (or other time as established by ordinance or charter), the chief administrative officer must submit the preliminary budget to the legislative body. The clerk must publish a notice once a week for two consecutive weeks in the official city newspaper that includes the following information: a copy of the preliminary budget is available to any taxpayer; and the date, time, and place the legislative body will meet to discuss the budget (must be on or before the first Monday of the month preceding the beginning of the fiscal year). Prior to the beginning of the fiscal year, the legislative body must adopt an ordinance approving the budget. A complete copy of the final budget as adopted must be transmitted to the Association of Washington cities. The detail of the budget is specified by the state statute.

 

• Counties (Chapter 36.40 RCW). On or before the first Tuesday of September each year, the auditor must submit the budget to the board of county commissioners, who may accept or revise the preliminary budget. Immediately following the adoption of the preliminary budget, the county legislative authority must publish a notice once a week for two consecutive weeks in the official county newspaper that includes the following information: a copy of the preliminary budget is available to any taxpayer; and the date, time, and place the legislative body will meet to discuss the budget and making tax levies. Copies of the preliminary budget must be available two weeks prior to the first Monday in October. At the conclusion of the budget hearing the county legislative authority must adopt a resolution approving the budget.

 

• Diking, Diking Improvement or Consolidated Diking Districts (RCW 85.38.170). On or before December 1st each year, the governing body must adopt a resolution approving the budget and special assessments sufficient to finance the budget. A copy of the resolution must be forwarded immediately to the county commissioners and county treasurer.

 

• Drainage, Drainage Improvement or Consolidated Drainage Districts (RCW 85.38.170). On or before December 1st each year, the governing body must adopt a resolution approving the budget and special assessments sufficient to finance the budget. A copy of the resolution must be forwarded immediately to the county commissioners and county treasurer.

 

• Flood Control Districts (RCW 86.09.466). On or before November 1st each year, the board must adopt a budget including the amount of funds necessary for any and all district purposes. The district must submit this budget for approval by the county commissioners, who may accept the budget as submitted or revised. The district’s assessments for the year are limited to the approved budget.

 

• Flood Control Zones (RCW 86.15.140). Annually, at the same time that county budgets are required to be prepared, the board of supervisors must adopt a budget. The detail of the budget is specified by the state statute. The budget shall only be approved after a public hearing with notice per RCW 36.32.120(7).

 

• Library Districts (RCW 27.12.210). Annually, prepare and certify a budget to deliver to the county in ample time for the county to levy taxes.

 

• Sewerage Improvement Districts (RCW 85.38.170). On or before December 1st each year, the governing body must adopt a resolution approving the budget and special assessments sufficient to finance the budget. A copy of the resolution must be forwarded immediately to the county commissioners and county treasurer.

2.4.3.30 Requirements for local governments that are not limited to expenditures within their budget are as follows:

• Fire Districts (RCW 52.16.030). Annually, after the county board has equalized the assessments for general tax purposes, the district secretary must prepare and certify a budget for each fund. The budget must be delivered to the county board in ample time for the tax levies to be made for the district.

 

• Hospital Districts (RCW 70.44.060(6)). On or before November 1st, the superintendent must prepare and submit a proposed budget to the district commission. The district must publish a notice of a public hearing once a week for two consecutive weeks in a newspaper printed in and of general circulation of the county that states the date, time, and place the commission body will meet to discuss the budget. The hearing must be held on or before November 15th. At the conclusion of the hearing, the commission must adopt a resolution approving the budget. Note: Hospital districts are not required to amend their budgets if actual expenditures exceed those budgeted.

 

• Housing Authorities. Not required by state law to create or follow a budget. However, authorities are required to create budgets for most of the federal grants they receive. The authority’s responsibilities for these budgets would be a matter of grant compliance.

 

• Irrigation/Reclamation Districts (RCW 87.80.160). Not required by state law to create or follow a budget. However, Boards of Joint Control established under Chapter 87.80 RCW must prepare annual budgets.

 

• Port Districts (Chapter 53.35 RCW). On or before the September 15 each year, port commission must prepare a preliminary budget showing estimated revenues and expenses. Between September 15 and the first Tuesday (following the first Monday) in October, the port must advertise, hold a hearing and adopt a final budget by resolution. The port has until the first Wednesday (following the first Monday) in October to submit a certified copy of the budget to the county. However, ports are not required to limit expenses to budgeted amounts.

 

• Public Development Authorities. Not specifically required by state law to create or follow a budget. However, PDAs operations and funds are subject to the creating government’s limitations and budgeting restrictions.

 

• Public Facilities Districts. As a proprietary fund, PFDs are not subject to budgeting requirements; they are not required by state law to create or follow a budget.

 

• Public Utility Districts (RCW 54.16.080). If property taxes are levied, a budget is required, although the PUD is not required to limit expenses to budgeted expenses. On or before the first Monday in September, the district must prepare a preliminary budget. A notice of the budget hearing must be published at least two consecutive weeks in a newspaper of general circulation within the county. The hearing must occur on the first Monday in October, at which the commission must adopt the budget by resolution.

 

• Water/Sewer Districts. As a proprietary fund, water-sewer districts are not subject to budgeting requirements.

Budget amendments

2.4.3.40 For governmental funds (except those types specifically identified above in 2.4.3.30), budgeted appropriations are legally binding. This means that the government cannot spend more than the amount budgeted. As new information becomes available throughout the year, the government can amend (increase) the budget through formal processes. Budget compliance is determined at the end of the fiscal period. Therefore, amendments may be done at any time during the fiscal period, but cannot be done after the fiscal period. If the entity adopts a biennial budget, amendments may be made at any time during the biennium. Regardless, budgetary authority must be in place before actual expenditures are made.

The following local governments have specific requirements for adoption of supplemental budgets:

• Flood Control Zones (RCW 86.15.140). If additional funds become available, a supplemental budget may be done covering additional authorized improvements. Supplemental budgets shall only be approved after a public hearing with notice per RCW 36.32.120(7).

 

• Port Districts (RCW 53.35.050). Supplemental budgets may only be adopted by resolution subsequent to a hearing that is advertised between 5 and 15 days in advance of the hearing.

 

2 Budgeting

2.4 Budget Compliance

2.4.2 Budget Process

2.4.2.10 The budgetary process encompasses a number of different activities and decisions over a period of several months. See the budget calendar below for cities and counties. Similar steps can be used to develop all types of budgets.

		BUDGET CALENDAR
Steps in Budget Preparation		Cities	Counties
1	BUDGET ESTIMATES Department heads are requested by clerk to prepare estimates of revenue and expenditures for the next fiscal year.	On or before the second Monday of the fourth month prior to the beginning of the city's/town's next fiscal year (i.e., September).	On or before the second Monday in July.
		RCW 35.33.031 (2nd, 3rd, towns, 1st class	RCW 36.40.010
		RCW 35.34.050 (Biennial Budgets)
		RCW 35A.33.030 (Code Cities)
		RCW 35A.34.050 (Code Cities - Biennial Budgets)
2	BUDGET ESTIMATES Estimates are to be filed with the city clerk/county auditor.	On or before the fourth Monday in September.	On or before the second Monday in August.
		RCW 35.33.031 (2nd, 3rd, towns, 1st class
		RCW 35.34.050 (Biennial Budgets)	RCW 36.40.010
		RCW 35A.33.030 (Code Cities)
		RCW 35A.34.050 (Code Cities - Biennial Budgets)
3	PROPOSED PRELIMINARY BUDGET Estimates are presented to the chief administrative officer for modification, revision, or additions.	On or before the first business day in October.	County auditor or chief financial officer shall prepare the county budget.
		RCW 35.33.051 (2nd, 3rd, towns, 1st class	RCW 36.40.040
		RCW 35.34.070 (Biennial Budgets)
		RCW 35A.33.050 (Code Cities)
		RCW 35A.34.070 (Code Cities - Biennial Budgets)
4	PRELIMINARY BUDGET Chief administrative officer provides the legislative body with:	(a) Revenue estimates (setting of levies) due no later than the first Monday in October.	(a) Revenue estimates are part of the preliminary budget process and due when preliminary budget is due. See next section.
	(a) Estimates of revenues (setting of levies),	RCW 35.33.135 (2nd, 3rd, towns, 1st class	RCW 36.40.040; RCW 36.40.090
		RCW 35.34.230 (Biennial Budgets)
		RCW 35A.33.135 (Code Cities)
		RCW 35A.34.230 (Code Cities - Biennial Budgets)
	(b) Clerk's proposed preliminary budget, and	(b) Preliminary budget at least 60 days before the beginning of the next fiscal year and,	(b) Preliminary budget submitted by the auditor to the Board of County Commissioners on or before the 1st Tuesday in September for adoption of the preliminary budget.
	(c) Copies of the preliminary budget are made available to the public.	(c) Copies are made available to the public not later than six weeks before the beginning of the city's next fiscal period.	(c) Copies of the preliminary budget are available to the public not later than two weeks immediately preceding the first Monday in October.
		RCW 35.33.055 (2nd, 3rd, towns, 1st class	RCW 36.40.050; RCW 36.40.060
		RCW 35.34.080 (Biennial Budgets)
		RCW 35A.33.052 (Code Cities)
		RCW 35A.34.080 (Code Cities - Biennial Budgets)
5	NOTICE OF PUBLIC HEARING Clerk publishes notice of filing of preliminary budget with city clerk and publishes notice of public hearing on final budget once a week for two consecutive weeks.	Published no later than the first two weeks in November.	Notice shall be published once each week for two consecutive weeks immediately following adoption of the preliminary budget.
		RCW 35.33.061 (2nd, 3rd, towns, 1st class	RCW 36.40.060
		RCW 35.34.100 (Biennial Budgets)
		RCW 35A.33.060 (Code Cities)
		RCW 35A.34.100 (Code Cities - Biennial Budgets)
6	PUBLIC HEARING Budget hearing is held.	On or before the first Monday of December, and may be continued from day to day but not later than the 25th day prior to the commencement of the new fiscal year.	On the first Monday in October.
		RCW 35.33.071 (2nd, 3rd, towns, 1st class	RCW 36.40.070
		RCW 35.34.110 (Biennial Budgets)
		RCW 35A.33.070 (Code Cities)
		RCW 35A.34.110 (Code Cities - Biennial Budgets)
7	FINAL BUDGET Adoption of budget for next fiscal year.	Following the conclusion of the hearing and prior to the beginning of the fiscal year, the legislative body shall by ordinance adopt the budget in its final form.	At the conclusion of the budget hearing, the county legislative authority shall by resolution adopt the budget.
		A copy of the finalized budget must be sent to the Association of Washington Cities.	A copy of the finalized budget must be sent to the State Auditor's Office.
		RCW 35.33.075 (2nd, 3rd, towns, 1st class	RCW 36.40.080
		RCW 35.34.120 (Biennial Budgets)
		RCW 35A.33.075 (Code Cities)
		RCW 35A.34.120 (Code Cities - Biennial Budgets)

Which funds need budgets?

2.4.2.20 Generally, all governmental funds including the general fund (also called the current expense fund) and special revenue funds of a local government must have annual/biennial appropriated budgets. Most debt service and capital project fund budget requirements are met by the continuing appropriation contained in the enabling legislation. These funds may not need annual/biennial appropriated budgets.

2.4.2.30 Expenses of proprietary, internal service and fiduciary funds are not considered to be appropriations and therefore are only subject to budgeting requirements as required by the government’s policy.

2.4.2.40 Fiduciary and permanent funds are subject to the trust agreement and their use is restricted by such.

2.4.2.50 Local governments may separately account for different aspects of a legal fund in several “sub-funds” on their general ledger for managerial purposes and roll-up these funds for financial reporting purposes. The minimum level of detail for budget purposes is the legal fund level.

2.4.2.60 Budgeted expenditures (or estimated expenses) should be limited to the amount of budgeted revenues plus the beginning fund balance. Governments are not authorized to appropriate (or estimate) more resources for expenditures than are available. Note that this requirement only applies at the legal fund level. Entities may budget a negative fund balance for departments, programs or sub-funds so long as the combined fund balance for the legal fund is positive.

What constitutes appropriations?

2.4.2.70 All final amounts budgeted as expenses, expenditures, transfers and other financing uses for a fund or department is the appropriation. The government cannot legally exceed this amount. Ending fund balance and nonrevenues (BARS 508 and 58X, if shown on the budget) would not be considered an appropriation. Only line items shown as expenditures (BARS 51X-57X and 59X) would be considered appropriations.

3 Accounting

3.1 Accounting Principles and Internal Control

3.1.10 Accounting Principles

3 Accounting

3.1 Accounting Principles and Internal Controls

3.1.7 Fund Accounting and Fund Types

Quick Links

3.1.7.20 Accounting and reporting capabilities

3.1.7.30 Fund accounting systems

3.1.7.40 Types of funds

Governmental funds

Code 000 - General (Current Expense) Fund

Code 100 - Special Revenue Funds

Code 200 - Debt Service Funds

Code 300 - Capital Projects Funds

Code 700 - Permanent Funds

Proprietary funds

Code 400 - Enterprise Funds

Code 500 - Internal Service Funds

Fiduciary funds

Overview

Code 600 - Fiduciary Funds

Code 600-609 - Investment Trust Funds

Code 610-619 - Pension (and Other Employee Benefit) Trust Fund

Code 620-629 - Private-Purpose Trust Funds

Code 630-698 - Custodial Funds

Code 699 - External Investment Pool Fund

3.1.7.50 Number of funds

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3.1.7.10 The following principles are basic rules of accounting and financial reporting for cash basis cities, counties and special purpose districts.

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3.1.7.20 Accounting and reporting capabilities

A governmental accounting system must make it possible to determine and demonstrate compliance with finance related legal and contractual provisions.

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3.1.7.30 Fund accounting systems

A governmental accounting system should be organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related expenditures and residual balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.

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3.1.7.40 Types of funds

In fund financial statements, governments should report governmental, proprietary, and fiduciary funds to the extent that they have activities that meet the criteria for using these funds. Presented below is a system to classify all funds used by local government and the assignment of code numbers to identify each type of fund. A three-digit code is used: the first digit identifies the fund type, and the next two digits will be assigned by the government to identify each specific fund.

Since counties account for special purpose districts in their accounting systems as fiduciary funds, they often provide the districts with reports showing assigned fund codes 630-699. These codes refer to the fund from the county perspective. A district has to “reassign” the county code to the code appropriate to the fund type it is reporting (e.g., if the district’s general fund is coded in the county records as 663, the district in its annual report has to code this fund as 001).

For reporting purposes local governments are required to follow the fund structure described below. However, the local governments may create other funds for accounting or managerial purposes. When preparing external financial reports, those funds should be rolled to appropriate fund types as discussed at BARS 3.1.12, Managerial Funds.

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Governmental funds

Code 000 - General (Current Expense) Fund – should be used to account for and report all financial resources not accounted for and reported in another fund. For reporting purposes, the local government can have only one general fund.

Although a local government has to report only one general fund in its external financial reports, the government can have multiple subfunds for its internal managerial purposes. These funds should follow guidance found at BARS 3.1.12, Managerial Funds.

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Code 100 - Special Revenue Funds – may be used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specific purposes other than debt service or capital projects. Restricted revenues are resources externally restricted by creditors, grantors, contributors or laws or regulations of other governments or restricted by law through constitutional provisions or enabling legislation. Committed revenues are resources with limitations imposed by the highest level of the government (e.g., board of commissioners, city council, etc.) through a formal action (resolution, ordinance) and where the limitations can be removed only by a similar action of the same governing body. Revenues do not include other financing sources (long-term debt, transfers, etc.).

The term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues should be foundation for a special revenue fund. They should be expected to continue to comprise a substantial portion of the inflows reported in the fund. It is recommended that at least 20 percent is a reasonable limit for restricted and committed revenues to create a foundation for a special revenue fund. Local governments need to consider factors such as past resource history, future resource expectations and unusual current year inflows such as debt proceeds in their analysis.

They may use the calculation below to determine whether an activity would qualify for reporting as a special revenue fund.

Substantial portion of inflows =	(restricted revenues + committed revenues)
	total resources* reported in the fund

*Total resources would include all revenues and other financing sources. 

Other resources (investment earnings and transfers from other funds, etc.) also may be reported in the fund if these resources are restricted, committed, or assigned (intended) to the specific purpose of the fund.

Governments should discontinue reporting a special revenue fund, and instead report the fund’s remaining resources in the general fund, if the government no longer expects that a substantial portion of the inflows will derive from restricted or committed revenue sources.

All revenues must be recognized in the special revenue fund. If the resources are initially received in another fund, such as the general fund, and subsequently remitted to a special revenue fund, they should not be recognized as revenue in the fund initially receiving them. They should be recognized as revenue in the special revenue fund from which they will be expended.

Special revenue funds should not be used to account for resources held in trust for individuals, private organizations, or other governments.

The state statutes contain many requirements for special funds to account for different activities. The legally required funds do not always meet standards for external reporting. So, while the local governments are required to follow their legal requirements, they will have to make some adjustment to their fund structure for external financial reporting.

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Code 200 - Debt Service Funds – may be used to account for and report financial resources that are restricted, committed, or assigned (intended) to expenditure for principal and interest. Debt service funds should be used to report resources if legally mandated. Financial resources that are being accumulated for principal and interest maturing in future years also should be reported in debt service funds. The debt service transactions for a special assessment for which the government is not obligated in any matter should be reported in a custodial fund. Also, if the government is authorized, or required to establish and maintain a special assessment bond reserve, guaranty, or sinking fund, it is required to use a debt service fund for this purpose.

Note: Debt service funds should not be used in proprietary funds (400 and 500). Use enterprise funds (400) or internal service (500) for debt payments related to utilities and other business type activities.

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Code 300 - Capital Projects Funds – may be used to account for and report financial resources that are restricted, committed, or assigned (intended) for expenditure for capital outlays including the acquisition or construction of capital facilities or other capital assets. Capital outlays financed from general obligation bond proceeds should be accounted for through a capital projects fund. Capital project funds exclude those types of capital-related outflows financed by proprietary funds or for assets that will be held in trust for individuals, private organizations, or other governments (private-purpose trust funds).

Note: Capital project funds should not be used in proprietary funds (400 and 500). Use enterprise funds (400) or internal service (500) for capital payments related to utilities and other business type activities.

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Code 700 - Permanent Funds – should be used to account for and report resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs – that is for the benefit of the government or its citizens (public-purpose).

Permanent funds are required to have a nonspendable cash balance for the principal portion that cannot be spent. Any unspent interest remaining in the fund would be reported under one of the other cash balance classifications, such as restricted.

Generally, only the principal amounts, interest revenue, and transfers to the appropriate operating fund for interest revenue use should be reported in this fund. Note: if the allowable use of the interest earnings is related to operating expenses that are normally reported in another fund, the permanent fund should transfer the allowable amount to the appropriate operating fund.

Permanent funds do not include private-purpose trust funds which account for resources held in trust for individuals, private organizations, or other governments. 

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Proprietary funds

Code 400 - Enterprise Funds – may be used to report any activity for which a fee is charged to external users for goods or services. Enterprise funds are required for any activity whose principal revenue sources meet any of the following criteria:

• Debt backed solely by a pledge of the net revenues from fees and charges.
• Legal requirement to recover cost. An enterprise fund is required to be used if the cost of providing services for an activity including capital costs (such as depreciation or debt service) must be legally recovered through fees or charges.
• Policy decision to recover cost. It is necessary to use an enterprise fund if the government’s policy is to establish activity fees or charges designed to recover the cost, including capital costs (such as depreciation or debt service).

These criteria should be applied in the context of the activity’s principal revenue source.

The term activity generally refers to programs and services. This term is not synonymous with fund. As a practical consequence, if an activity reported as a separate fund meets any of the three criteria, it should be an enterprise fund. Also, if a “multiple activity” fund (e.g., general fund) includes a significant activity whose principal revenue source meets any of these three criteria, the activity should be reclassified as an enterprise fund.

The determination of an activity’s principal revenue source is a matter of professional judgement. A good indicator of the activity’s significance may be comparing pledged revenues or fees and charges to total revenue. For example, consider a county auditor’s office that charges fees to provide a payroll service to various taxing districts. Even if the fee is meant to cover the cost of the service, the county auditor function as a whole is primarily supported with tax dollars from the general fund. It would be allowable in this case to leave the activity all within general fund.

Finding an appropriate fund type requires a careful analysis since there is not always a clear choice. For example, building permit fees may be accounted for in the general fund or a special revenue fund in certain circumstances, such as when they are partially supported by taxes. However, if there is a pricing policy to recover the cost of issuing those individual building permits, they should be reported in an enterprise fund.

Separate funds are not required for bond redemption, construction, reserves, or deposits, for any utility. If separated, use 400 series number. Separate funds are not required even though bond covenants may stipulate a bond reserve fund, bond construction fund, etc. The bond covenant use of the term fund is not the same as the use in governmental accounting. For bond covenants, fund means only a segregation or separate account, not a self-balancing set of accounts.

Local governments may separate operating, capital projects and debt functions of enterprise funds. However, when reporting such proprietary activities, all those functions should be rolled into one fund.

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Code 500 - Internal Service Funds – may be used to report any activity that provides goods or services to other funds, departments or agencies of the government, or to other governments, on a cost-reimbursement basis. Internal service funds should be used only if the reporting government is the predominant participant in the activity. Otherwise, the activity should be reported in an enterprise fund. Cash basis special purpose districts (such as a fire or water district) should not use the internal service fund category. For more information on accounting for these funds see BARS 3.9.6, Internal Service Funds. 

Note: When calculating the predominant participant, purchases from fiduciary funds would be considered part of the reporting government’s activity, but the BARS coding would still be to an external customer.

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Fiduciary funds

In general, fiduciary funds are resources that are held by a government for the benefit of others.

To determine if an activity should be reported in a fiduciary custodial fund see BARS 3.1.11, Determining Fiduciary Activities to be Reported in Custodial Funds. 

If activity is determined to be fiduciary, the funds should be reviewed for trust arrangements and equivalents. The three criteria for determining if a fiduciary activity is a trust are:

1. The government itself is not a beneficiary
2. Dedicated to providing benefits in accordance with the benefit terms
3. Legally protected from the government’s creditors

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Code 600 - Fiduciary Funds – should be used to account for assets held by a government in a trustee capacity or as a custodian for individuals, private organizations, other governmental units, and/or other funds. These include (a) investment trust funds, (b) pension (and other employee benefit) trust funds, (c) private-purpose trust funds, (d) custodial funds and (e) external investment pool funds.

Code 600-609 - Investment Trust Funds – should be used to report fiduciary activities from the external portion of investment pools and individual investment accounts that are held in a trust or equivalent that meets the criteria above.

In addition to the trust criteria requirements above, all individual investment accounts are required to be reported in an Investment Trust Fund.

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Code 610-619 - Pension (and Other Employee Benefit) Trust Funds – should be used to report fiduciary activities for pension plans and OPEB plans that are administered through qualifying trusts. Qualifying trusts are those in which:

• Contributions to the plan, and earnings on those contributions, are irrevocable. Pay-as-you-go plans do not qualify because they are “payments,” not contributions.
• Plan assets are dedicated solely to providing benefits to plan members in accordance with the benefit terms. Different plans (for example a pension and an OPEB plan) cannot be commingled in the same trust. The assets must be partitioned for specific plans.
• Plan assets are legally protected from creditors.

If you are acting as administrator for someone else’s pension/OPEB plans, the plans still must meet the criteria above to be reported in a trust fund.

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Code 620-629 - Private-Purpose Trust Funds – should be used to report all fiduciary activities that (a) are not required to be reported in pension (and other employee benefit) trust funds or investment trust funds, and (b) are held in a trust or equivalent that meets the criteria above.

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Code 630-698 - Custodial Funds – should be used to report all fiduciary activities that are not required to be reported in pension (and other employee benefit) trust funds, investment trust funds or private purpose trust funds. The external portion of the investment pools that are not held in trust that meets criteria listed above should be reported in a separate external investment pool fund column under the custodial funds classification.

Note: The custodial funds are required to be used by business-type activities and enterprise funds, except when the resources will normally be held for less than ninety (90) days.

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Code 699 - External Investment Pool Fund – The external portion of the investment pools that are not held in trust and meet criteria listed above. Although this is considered a custodial fund, it should be reported in a separate external investment pool fund column under the custodial funds classification.

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3.1.7.50 Number of funds

Governments should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established. Using numerous funds results in inflexibility, undue complexity, and inefficient financial administration.

Local governments should periodically undertake a comprehensive evaluation of their fund structure to ensure that individual funds that became superfluous are eliminated from accounting and reporting.

Elected officials should be educated to the fact that fiscal accountability may be achieved effectively and efficiently by use of department, program and other available account coding or the cautious use of managerial (internal) funds. See guidance at BARS 3.1.12, Managerial Funds for additional information regarding managerial funds.

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3 Accounting

3.1 Accounting Principles and Internal Controls 

3.1.11 Determining Fiduciary Activities to be Reported in Custodial Funds

Quick Links

3.1.11.10 Purpose

3.1.11.20 Determination questions

3.1.11.30 Prescribed custodial transactions

Leasehold tax and other state mandated taxes

Department of Licensing accounts (counties only)

Permits and certificates fees (concealed pistol permits, birth certificates, etc.)

Flexible Savings Accounts (FSA) and Health Savings Accounts (HSA)

3.1.11.40 Prescribed non-custodial activities

Impact fees (cities & counties only)

Retainage and refundable deposits

Payroll clearing accounts

Flexible Savings Accounts (FSA) and Health Savings Accounts (HSA)

Court accounting

Cities and counties with their own court

1. Administrative Office of the Courts (AOC) mandated fees (BARS Codes 386/586)

2. Local government revenue fines and fees BARS Codes

3. State distributions to local government

Cities and counties that contract for court

1. Administrative Office of the Courts (AOC) mandated fees (BARS Codes 386/586)

2. Local government revenue fines and fees BARS Codes

3. Payment for court services

Cash basis – providing court services

1. Administrative Office of the Court (AOC) mandated fees (386/586)

2. Court provider’s collection/remittance of the fines and fees for the city/county receiving the court service

3. Revenue for court services

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3.1.11.10 Purpose

Due to the generally accepted accounting principles established by the Governmental Accounting Standards Board  and Washington State law that requires the Office of the Washington State Audit to prescribe a uniform system of accounting for local governments, fiduciary activities implementation is required by all local governments. The accounting standards for these activities only provide a framework which could lead to incorrect implementation, therefore the Auditor’s Office has prescribed certain activities as custodial and therefore should be reported in a Fiduciary Custodial Fund. Additionally, the Auditor’s Office has prescribed certain activities that may appear custodial, but are ultimately not custodial and therefore would be reported in the appropriate governmental or proprietary fund.

Business Type Activities: If the resources are normally held for less than 90 days, then fiduciary reporting is not required for those resources.

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3.1.11.20 Determination questions

1. Are the assets associated with the activity controlled by the government?

A government is considered to be controlling assets if either:

(a) The government holds the assets. An example of holding assets is when a government receipts money or has the money in the government’s bank account.

or

(b) The government has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended recipients.

For purposes of this criteria a government uses an asset when it expends or consumes that asset for the benefit of individuals, organization, or other governments, outside of the government’s provision of services to them.

Restrictions from legal or other external restraints that stipulate the assets can be used only for a specific purpose do not negate a government's control of the assets. When a government appoints a designee to act on its behalf, the designee is performing the government's fiduciary duties and not assuming them. Thus, appointing a designee to act on its behalf does not alter the government's ability to direct the use, exchange, or employment of the assets.

Examples include:

The holding government is the treasurer for another government or acting as their bank.

The government is on the bank account such as construction accounts with contractors.

Any asset the government is holding for another government where the holding government is not using the asset for their own operations.

If "no", this is not a fiduciary custodial activity; if "yes", proceed.

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2(a). Are the assets derived solely from the government's own-source revenues?

Own-source revenues are revenues that are generated by a government itself. They include exchange and exchange-like revenues (for example, water and sewer charges for service) and investment earnings. Derived tax revenues (such as leasehold taxes) and imposed nonexchange revenues (such as property taxes) are also included in own-source revenue.

Each component of a transaction must be separately evaluated.

Examples include:

When a local government leases office space the lease revenue is own-source revenue while the collected leasehold excise tax is not own-source revenue because that portion is imposed by the state under Chapter 82.29A RCW.

When a county or city imposes an impact fee those revenues are generated by that government and are own-source revenue even when those resources are required to be 100 percent remitted to other governments (such as to a school, fire or park district). The county’s or city’s ability to levy the fee by RCW means this revenue is own-source revenue.

If "yes", this is not a fiduciary custodial activity; if "no", proceed.

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2(b). Are the assets associated with the activity from either government-mandated or voluntary nonexchange transactions?

Government-mandated nonexchange transactions, occur when a government provides resources to another government and requires the recipient government to use the resources for a specific purpose (for example, federal programs that state or local governments are mandated to perform or state programs that local governments are mandated to perform).

Examples include:

Washington State Department of Revenue’s requirement that all sales tax be remitted to the State for allocation and disbursement.

Washington State’s mandate on cities and counties to perform concealed permit processing.

Voluntary nonexchange transactions, result from legislative or contractual agreements, other than exchanges, entered into willingly by the parties to the agreement (for example, certain grants and private donations for government programs).

Examples include:

Administrative Office of the Courts mandated fees collected by cities and counties.

Washington State Department of Licensing functions that counties are contracted to perform.

Donations to a government for one of its programs would be voluntary nonexchange revenue and the answer would be "yes". However, a donation given to a government for the benefit of a third party would be answered "no" (this revenue classification does not apply because the resources are not governmental revenue)

If "no" (meaning not government-mandated or voluntary exchange transactions), proceed to step (3); if "yes" proceed to 2(c).

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2(c). Are the assets from pass-through grants for which the government does not have administrative involvement or direct financial involvement?

A government has administrative involvement if it, for example (a) monitors secondary recipients for compliance with program-specific requirement, (b) determines eligible secondary recipients or projects, even if using grantor-established criteria, or (c) has the ability to exercise discretion in how the funds are allocated.

A government has direct financial involvement if it, for example, (a) finances some direct program costs because of grantor-imposed matching requirements, or (b) is liable for disallowed costs.

An example is:

A government does not have administrative involvement when a jail corrections officer approves inmate purchases ordered outside the corrections facility (to help ensure that contraband does not enter the facility). Keeping contraband out of the facility is a general goal of the government and not specific to overseeing the use of those funds.

If "no" (meaning the government has administrative or direct financial involvement), this is not a fiduciary activity; if "yes", proceed.

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3. Are any one of the following three sets of criteria true? (all parts of the individual set must be met)

3(a). The assets are:

(a) administered through a trust in which the government itself is not a beneficiary,

(b) dedicated to providing benefits to recipients in accordance with the benefit terms, and

(c) legally protected from the creditors of the government.

If this set of criteria is true the assets should be reported in a fiduciary trust fund.

or

3(b). The assets are:

(a) for the benefit of individuals and

(b) the government does not have administrative involvement with the assets or direct financial involvement with the assets.

(c) In addition, the assets are not derived from the government's provision of goods and services to those individuals.

Provision of goods and services examples:

The government sells maps, umbrellas, utilities (water/sewer), etc.

The government provides services such as finger printing, background checks, etc.

Examples of when this set of criteria is true is inmate accounts for commissary purchases and patient accounts in certain medical facilities.

or

3(c). The assets are:

(a) for the benefit of organizations or other governments that are not part of the financial reporting entity and

(b) not derived from the government's provision of goods or services to those organization or other governments.

Examples include:

In evaluating each component of a transaction — collected leasehold excise tax is fiduciary because those specific dollars are for the benefit of the state and the tax is not derived from the collecting governments provision of goods or service to the state (the provision of services is to a third party).

When a government has a component unit that is considered part of the financial reporting entity, the component unit would not be reported in the fiduciary funds. The exception would be if the government was the acting fiscal agent, then the government would report the component unit in its custodial funds.

If "yes" to any one of the three sets of criteria, fiduciary reporting is applicable and activities should be reported in the custodial funds; if "no", this is not a fiduciary activity.

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3.1.11.30 Prescribed custodial transactions

Below is a list of prescribed custodial fund activities, including the responses to the custodial criteria questions.

 

Leasehold tax and other state mandated taxes

Step 1 – Are the assets associated with the activity controlled by the government?

Yes, the collecting government receives the tax and is holding the monies in their bank account until the monies are remitted to the State.

Step 2(a) – Are the assets derived solely from the government's own-source revenues?

No, these taxes are levied by the State through RCWs therefore they are not solely from the reporting government’s own-source revenue.

Step 2(b) – Are the assets associated with the activity from either government-mandated or voluntary nonexchange transactions?

Yes, these monies are from derived government-mandated tax revenue.

Step 2(c) – Are the assets from pass-through grants for which the government does not have administrative involvement or direct financial involvement?

No, these monies are not from a grant and the reporting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not in a trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, these monies are not for the benefit of individuals.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity? Are assets held for organizations or other governments not derived from the collecting government’s provision of goods or services to those organizations or other governments?

Yes, these monies are for the benefit of the State and the State is not part of the collecting government’s financial reporting entity. Yes, the collecting government did not provide a good or service to the State.

Conclusion: Leasehold tax and other state mandated taxes are fiduciary activities and should be reported in the custodial funds.

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Department of Licensing accounts (counties only)

Step 1 – Does the government control the asset?

Yes, the collecting government’s name and tax identification number are on the bank account.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, the State amounts are collected in addition to the local government’s revenues and are mandated by state law.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not from a government-mandated or nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the collecting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not in a trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, these monies are not for the benefit of individuals.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity? Are assets held for organizations or other governments not derived from the collecting government’s provision of goods or services to those organizations or other governments?

Yes, these monies are for the benefit of the State and the State is not part of the collecting government’s financial reporting entity. Yes, the collecting government did not provide a good or service to the State Department of Licensing.

Conclusion: The portion of the licensing fees that are the State’s portion are fiduciary activities and should be reported in the custodial funds. The collecting government’s portion of these fees are the government’s own-source revenue and should be reported in the reporting government’s governmental or proprietary funds.

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Permits and certificates fees (concealed pistol permits, birth certificates, etc.)

Step 1 – Does the government control the asset?

Yes, the collecting government receives the fees and is holding the monies in their bank account until the monies are remitted to the State.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, the State amounts are collected in addition to the local government’s revenues and are mandated by state law.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not derived from a government-mandated or nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the reporting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not in a trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, these monies are not for the benefit of individuals. While the citizen is receiving a certificate/permit from the city or county the citizen is not receiving a good or service from the government imposing the fee and issuing the permits and/or certificates (the State).

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity? Are assets held for organizations or other governments not derived from the collecting government’s provision of goods or services to those organizations or other governments?

Yes, these monies are for the benefit of the State and the State is not part of the collecting government’s financial reporting entity. Yes, the collecting government did not provide a good or service to the State.

Conclusion: The portion of the permit/certificate fees that are the State’s portion are fiduciary activities and should be reported in the custodial funds. The collecting government’s portion of these fees are for the direct benefit of the collecting government and should be reported in the collecting government’s governmental or proprietary funds.

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Flexible Savings Accounts and Health Savings Accounts (Government holds the monies for an administrator and reimburses based on administrator determination).

Step 1 – Does the government control the asset?

Yes, the collecting government is holding the monies for an administrator.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, these deposits are from the employee’s revenues and not the government’s directly.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not government-mandated or voluntary nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the reporting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not in a trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

Yes, these monies are for the benefit of employees under the IRS requirements.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity?

No, the administrator and the government have a contract that requires the government to collect the monies for the employees and reimburse for approved expenses.

Conclusion: Flexible Savings Accounts and Health Savings Accounts where the reporting government is holding the monies for the administrator of the plan and reimburses the employees based on direction from the administrator of the plan are fiduciary funds.

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3.1.11.40 Prescribed non-custodial activities

Impact fees (cities & counties only)

Step 1 – Does the government control the asset?

Yes, the collecting government receives the fees and is holding the monies in their bank account until the monies are remitted to the school, fire, or park district.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

Yes, these fees can only be levied by the collecting government per state law (RCW 82.02.050 - 82.02.110 and WAC 365-196-850).

Conclusion: Not a fiduciary activity. Under state law, only cities and counties can authorize and levy impact fees for school, fire, or park districts. Since the city or county is levying the impact fees these monies would be own-source revenue and reported in the governmental funds of the city or county.

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Retainage and refundable deposits

Step 1 – Does the government control the asset?

Yes, the collecting government receives the fees and is holding the monies in their bank account until the contracting party meets their obligations.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

Yes, although these deposits could be revenues for the collecting government, as revenue recognition is dependent on the contracting party meeting certain criteria in order for the collecting government to remit the retainage and/or deposit to the contracting party.

Conclusion: Not a fiduciary activity, since these monies are derived from the government’s own-source revenue. Therefore the retainage and refundable deposits should be reported in the government’s governmental or proprietary funds.

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Payroll clearing accounts

Step 1 – Does the government control the asset?

Yes, the collecting government receives the fees and is holding the monies in their bank account until remittance to the mandating government (federal and/or state).

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, these deposits are from the employee’s revenues and not the government’s directly.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not government-mandated or voluntary nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the reporting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not in a trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, these monies are not for the direct benefit of individuals. While the employee benefits from the employing government withholding and paying the employee’s portion of taxes and other payroll items, the employee’s government is obligated by law to withhold and pay the appropriate employee related payroll withholdings.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity?

No, the mandating authority (federal and/or state government) requires the employing government to collect and remit these monies and has the legal authority to enforce the liability on the employing government.

Conclusion: Not a fiduciary activity, since these monies are for the benefit of the collecting government and therefore these items should be reported on the financial statements of the collecting government.

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Flexible Savings Accounts and Health Savings Accounts (Government holds the monies for an administrator and makes reimbursement decisions).

Step 1 – Does the government control the asset?

Yes, the collecting government is holding the monies for an administrator.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, these deposits are from the employee’s revenues and not the government’s directly.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not government-mandated or voluntary nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the reporting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not in a trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, while these monies are for the benefit of employees under the IRS requirements since the government is making reimbursement decisions there is administrative involvement.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity?

No, the administrator and the government have a contract that requires the government to collect the monies for the employees and reimburse for approved expenses.

Conclusion: Not a fiduciary activity, since these monies are under the administrative control of the government.

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Court accounting

Cities and counties with their own court

1. Administrative Office of the Courts (AOC) mandated fees (BARS Codes 386/586)

Step 1 – Does the government control the asset?

Yes, the government is collecting the fines and fees and holding the monies in their bank account until remitting the monies to the State.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, the AOC/state amounts are collected in addition to the local government’s revenue.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not a government-mandated or nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the reporting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not held in a qualifying trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, these monies are not for the benefit of individuals.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity? Are assets held for organizations or other governments not derived from the collecting government’s provision of goods or services to those organizations or other governments?

Yes, these monies are for the benefit of the state and the state is not part of the collecting government’s financial reporting entity. Yes, these funds are for the state and the local government’s court is not providing a direct service to the state.

Conclusion: AOC fees are fiduciary activities and should be reported in the custodial funds.

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2. Local government revenue fines and fees BARS Codes

Step 1 – Does the government control the asset?

Yes, the government is collecting the fines and fees and holding the monies in their bank account.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

Yes, as an example, the city’s police department or the county’s sheriff department issued the tickets during the performance of their public safety function and the revenue is generated by the city/county for their own use.

Conclusion: Not a fiduciary activity, the local government’s fines and fees are the government’s own revenue.

 

3. State distributions to local government

Step 1 – Does the government control the asset?

No, the State controls the money and distributes the money.

Conclusion: Not a fiduciary activity, the monies are not reported by the city/county until the money is received by the city/county from the state and would be considered own-source revenue upon receipt.

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Cities and counties that contract for court

1. Administrative Office of the Courts (AOC) mandated fees (BARS Codes 386/586)

Step 1 – Does the government control the asset?

Cities and counties that contract out for court services generally do not remit monies to the Administrative Office of the Courts (AOC). The court providing the service to the city/county generally remits the AOC monies for the contracting city/county. The city/county contracting for court services would therefore not report AOC fines and fees in their custodial funds.

 

2. Local government revenue fines and fees BARS Codes

Step 1 – Does the government control the asset?

No, the city or county does not control the asset, since the court the city contracted with holds the asset in their bank account.

Conclusion: Not a fiduciary activity, the monies are not the city/county until remitted from the court provided to the city/county.

 

3. Payment for court services

Step 1 – Does the government control the asset?

No, there is no asset. This is an expense for the city or county receiving the court services.

Conclusion: Not a fiduciary activity, this is a direct expense for the city/county receiving the court services and should be coded to BARS code 512.5P.PP.

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Cash basis – providing court services

1. Administrative Office of the Court (AOC) mandated fees (386/586) – Please see above BARS 3.1.11.40.    

 

2. Court provider’s collection/remittance of the fines and fees for the city/county receiving the court service

Step 1 – Does the government control the asset?

Yes, the court provider is collecting the fines and fees and holding the monies in their bank account.

Step 2(a) – Are the assets derived solely from the government’s own-source revenue?

No, these fines and fees are levied/ticketed by another government.

Step 2(b) – Are the assets derived from government-mandated or voluntary nonexchange transactions?

No, these monies are not a government-mandated or nonexchange transaction.

Step 2(c) – Are the assets derived from a pass-through grant for which the government has administrative involvement or direct financial involvement?

No, these monies are not from a grant and the collecting government does not have administrative or direct financial involvement.

Step 3(a) – Are the assets held in a trust or equivalent arrangement and the government itself is not a beneficiary?

No, these monies are not held in a qualifying trust.

Step 3(b) – Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement?

No, these monies are not for the benefit of individuals.

Step 3(c) – Are the assets for the benefit of organizations or other governments that are not part of the financial reporting entity? Are assets held for organizations or other governments not derived from the collecting government’s provision of goods or services to those organizations or other governments?

Yes, these monies are for the benefit of the city or county and the city or county is not part of the collecting government’s financial reporting entity. No, the collecting government is providing a service (court) for a fee to another government.

Conclusion: Not a fiduciary activity, the fines and fees are collected by the court provider for the local government for a fee and would be reported in the collecting government’s financial reports under BARS codes 382.30 and 582.30.

3. Revenue for court services

Step 1 – Does the government control the asset?

Yes, the government is collecting the fee holding the monies in their bank account.

Step 2 – Are the assets derived solely from the government’s own-source revenue?

Yes, this is the court provider’s revenue for performing the court service for a fee.

Conclusion: Not a fiduciary activity, the revenues are the court providers own revenue and should be coded to BARS code 341.49.00.

3 Accounting

3.1 Accounting Principles and Internal Control

3.1.12 Managerial Funds

A managerial fund is a separate set of accounts that governments may elect to use to track an activity at a more detailed level than may be available in a reportable fund. Creating and using managerial funds is optional. 

For discussion on the minimum number of funds necessary to be established (see BARS 3.1.7, Fund Accounting and Fund Types).

Clearing funds are not considered managerial funds. For more information on clearing funds, see BARS 3.8.6, Use of Payroll and Claims Funds. 

3.1.12.10 Operating a managerial fund

A managerial fund functions as a sub-fund of a reportable fund of the government. The sub-fund is designed to track the financial transactions related to the activity in which the sub-fund was created. A managerial fund does not have any special or specific operating rules and should be operated like all other funds of the government (e.g. debits must equal credits within the managerial fund).

3.1.12.20 Intrafund activity

It is common for managerial funds to engage in financial transactions with their respective reportable fund. These types of transactions are called intrafund activity and include activities such as transferring or lending of cash. Transfer and lending are the most common type of intrafund activity in managerial fund use; however the government should evaluate other transactions between the funds to determine if eliminations of that activity should occur, see BARS 3.1.12.30 below.

To ensure accurate reporting, governments should have a process for tracking and identifying the intrafund activity.

3.1.12.30 Eliminating activity and financial reporting

For financial reporting purposes, governments should roll up all managerial funds into their respective reportable funds. Managerial funds should not be presented separately on the financial statements. While some accounting systems may support this roll up process, other systems may not have the necessary functionality. In these cases, governments can use an off-book consolidation spreadsheet to manually combine managerial fund activity with the reportable fund, ensuring accurate and complete financial reporting.

For example, in a government’s accounting system there is a ‘Grants 301’ fund tracked as a managerial fund of the ‘General 001’ reportable fund. In this case, an off-book consolidation spreadsheet is used to assist the government in rolling the Grants 301 fund into the General 001 fund, as seen below.

		In accounting system		Eliminations	Reported
BARS Account	BARS Name	General 001	Grants 301		General 001
3083P00	Restricted - Beginning	$                     -	$ 60,453.00	$                       -	$ 60,453.00
3085P00	Assigned - Beginning	$ 22,693.00	$                       -	$                       -	$ 22,693.00
3111000	Property Tax	$ 29,138.00	$ 15,000.00	$                       -	$ 44,138.00
3164100	Business and Occupation Taxes on Utilities	$ 16,065.00	$                       -	$                       -	$ 16,065.00
3340423	State Award from Department of Commerce	$                     -	$ 50,000.00	$                       -	$ 50,000.00
3611100	Investment Earnings	$ 16.00	$ 4.00	$                       -	$ 20.00
3970000	Transfer in	$                    -	$ 10,000.00	$ 10,000.00	$                -
5142040	Financial Services	$ 22,693.00	$                       -	$                       -	$ 22,693.00
5186340	General Grants, Financial Assistance and Other Distributions to Others	$                    -	$ 44,251.00	$                       -	$ 44,251.00
5970000	Transfer out	$ 10,000.00	$                       -	$ 10,000.00	$                -
5085P00	Assigned - Ending	$ 22,693.00	$                       -	$                      -	$ 22,693.00
5083P00	Restricted - Ending	$ 12,526.00	$ 91,206.00	$                      -	$103,732.00

In this example, the government has consolidated (rolled up) all activity of the Grants 301 fund into the General 001 fund for financial reporting purposes. During this roll-up process in this example, the transfers in and transfers out were eliminated through the use of the eliminations column to prevent inflating the transfer activity in the financial statements.

Note: The roll-up of managerial funds does not constitute as a change in the reporting entity, as identified in BARS 3.1.10.60, Accounting Changes and Error Corrections, as long as the managerial fund has either consistently been consolidated into the reportable fund or the roll-up is occurring in a subsequent year following initial consolidation.

3.1.12.40 Moving a reported fund to a managerial fund

If a government determines that a previously reported fund on the financial statements will now operate as a managerial fund this would be reported as a change in reporting entity as identified in BARS 3.1.10.60, Accounting Changes and Error Corrections. This change must be disclosed and reported in the first year that the transition occurs.

A change in reporting entity should be reported as if the change occurred at the beginning of the fiscal year. To reflect a change in reporting entity, a government must adjust the beginning balance of the affected funds on the Schedule 01 using BARS codes 388.40.00 and 588.40.00. Additionally, all the reportable financial transactions in the managerial fund must be moved to the new reportable fund to ensure accurate and consistent financial reporting.

Note: Adjustments to consolidate managerial funds into the reportable funds are presented on the Schedule 01 only and should not be posted as transactions in the government’s accounting system to ensure both funds are still present in the government’s own systems.

This will require a government to perform a consolidation process. See an example of this process below.

		In accounting system		Reported funds
BARS Account	BARS Name	General 001	Grants 301	General 001	Grants 301
3083P00	Restricted - Beginning	$                              -	$ 60,453.00	$                              -	$ 60,453.00
3085P00	Assigned - Beginning	$ 22,693.00	$                              -	$ 22,693.00	$                              -
3884000	Change to or within Reporting Entity	$                              -	$                              -	$ 60,453.00	$                              -
3111000	Property Tax	$ 29,138.00	$ 15,000.00	$ 44,138.00	$                              -
3164100	Business and Occupation Taxes on Utilities	$ 16,065.00	$                              -	$ 16,065.00	$                              -
3340423	State Award from Department of Commerce	$                              -	$ 50,000.00	$ 50,000.00	$                              -
3611100	Investment Earnings	$ 16.00	$ 4.00	$ 20.00	$                              -
3970000	Transfer in	$                              -	$ 10,000.00	$                              -	$                              -
5142040	Financial Services	$ 22,693.00	$                              -	$ 22,693.00	$                              -
5186340	General Grants, Financial Assistance and Other Distributions to Others	$                              -	$ 44,251.00	$ 44,251.00	$                              -
5970000	Transfer out	$ 10,000.00	$                              -	$                              -	$                              -
5884000	Change to or within Reporting Entity	$                              -	$                              -	$                              -	$ 60,453.00
5085P00	Assigned - Ending	$ 22,693.00	$                              -	$ 22,693.00	$                              -
5083P00	Restricted - Ending	$ 12,526.00	$ 91,206.00	$ 103,732.00	$                              -

In the initial year of transition, a fund reclassified as a managerial fund will still be reported on the financial statements. However, it will only display the beginning balance and the disclosure of the change in reporting entity, indicating where the beginning balances of the fund went. After the initial year, the fund is now considered a managerial fund and will follow the standard roll up process for reporting following the guidance in the section BARS 3.1.12.30 above.

3.1.12.50 Moving a managerial fund to a reported fund

If a government decides to begin reporting a fund – previously treated as a managerial fund and consolidated into another fund – as a standalone fund in the financial statements, this would constitute as a change in reporting entity as identified in BARS 3.1.10.60, Accounting Changes and Error Corrections, for the first year the decision is made. This change must be disclosed and reported in the first year that the transition occurs.

A change in reporting entity should be reported as if the change occurred at the beginning of the fiscal year. To reflect a change in reporting entity, a government must adjust the beginning balance of the affected funds on the Schedule 01 using BARS codes 388.40.00 and 588.40.00. Additionally, all the reportable financial activities that were reported in the initial managerial fund must now be moved to the new reported fund. This process is the reverse of the example shown in BARS 3.1.12.30, since the financial statements will now report both funds.

Note: Adjustments to separate a managerial fund from its reportable fund are presented on the Schedule 01 only. The government’s accounting system should continue to maintain the separate funds.

See an example of the separation of a managerial fund from its reportable fund below.

		Rolled-up	Reported Funds
BARS Account	BARS Name	General 001	General 001	Grants 301
3083P00	Restricted - Beginning	$ 60,453.00	$ 60,453.00	$                              -
3085P00	Assigned - Beginning	$ 22,693.00	$ 22,693.00	$                              -
3884000	Change to or within Reporting Entity	$                              -	$                              -	$ 60,453.00
3111000	Property Tax	$ 44,138.00	$ 29,138.00	$ 15,000.00
3164100	Business and Occupation Taxes on Utilities	$ 16,065.00	$ 16,065.00	$                              -
3340423	State Award from Department of Commerce	$ 50,000.00	$                              -	$ 50,000.00
3611100	Investment Earnings	$ 20.00	$ 16.00	$ 4.00
3970000*	Transfer in	$                              -	$                              -	$ 10,000.00
5142040	Financial Services	$ 22,693.00	$ 22,693.00	$                              -
5186340	General Grants, Financial Assistance and Other Distributions to Others	$ 44,251.00	$                              -	$ 44,251.00
5970000*	Transfer out	$                              -	$ 10,000.00	$                              -
5884000	Change to or within Reporting Entity	$                              -	$ 60,453.00	$                              -
5085P00	Assigned - Ending	$ 22,693.00	$ 22,693.00	$                              -
5083P00	Restricted - Ending	$ 103,732.00	$ 12,526.00	$ 91,206.00

*Note: the transfer in and transfer out transactions between these funds would now be reported on financial statements since the funds no longer represent a managerial fund/reportable fund relationship.

3 Accounting

3.1 Accounting Principles and Internal Control

3.1.8 Beginning and Ending Cash and Investments Classifications

Quick Links

External restrictions

Internal commitments

Fund perspective

Emergency funds, savings accounts, and rainy day funds

Flow of funds assumptions

Reporting a negative cash and investment classification balance

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3.1.8.10 There are often limitations on how all or a portion of a government’s resources can be spent. Accordingly, the BARS manual requires beginning and ending cash and investments be classified as nonspendable, restricted, committed, assigned, or unassigned. These classifications indicate “the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent.” The classifications reflect these limitations and inform management and financial statement users how much of the government’s resources are reserved for a specific purpose or use and how much is freely available for spending.

3.1.8.20 BARS accounts 3082100 and 5082100 define the beginning and ending nonspendable cash and investments as the amounts of cash and investments that according to laws or contracts cannot be spent (required to be maintained intact). This category applies to items like permanent endowments when the donor stipulates that the principal amount of the contribution must be preserved and invested and only the earnings can be used for governmental purposes.

This category can only be used in permanent (700) and trust (600-629) funds.

3.1.8.21 BARS accounts 3083100 and 5083100 define the beginning and ending restricted cash and investments as the amounts of cash and investments that is subject to externally enforceable legal restrictions (imposed by creditors, grantors, donors, other governments, most voter approved levies, etc.). The restrictions may also be imposed by law through constitutional provisions or enabling legislation. For more information on external restrictions please see BARS 3.1.8.40 below.

This category can be used in all fund types. Custodial funds must report beginning and ending cash and investment balances in this category.

3.1.8.22 BARS accounts 3084100 and 5084100 define the beginning and ending committed cash and investments as the amounts of cash and investments that is constrained by specific limitations that the government imposes upon itself at the highest level of decision making (normally the governing body) through the most binding formal action (e.g. resolution, ordinance, etc.) and that remains binding unless removed in the same manner. For more information on internal restrictions please see BARS 3.1.8.50 below.

This category can be used only in governmental and proprietary funds.

3.1.8.30 BARS accounts 3085100 and 5085100 define the beginning and ending assigned cash and investments as the amounts of cash and investments that reflects a government’s intended use of resources. These are amounts intended to be used by the government for specific purposes that are neither restricted nor committed. Intent can be expressed in one of two ways:

• The governing body can state its intent to use resources for a specific purpose. The intent would be expressed in an informal way such as a motion or other form of a directive.
• The governing body can delegate authority to others (e.g., finance or executive director, chief, head of a department, manager, etc.) to express intent to use amounts for specific purposes.

Any transfer of resources to funds other than the general fund represents an assignment since the transfer represents the intent for those resources to be used for a specific purpose.

The creation of a fund outside of the general fund is considered at least assigned, since the creation of a fund automatically sets aside the monies for a purpose.

By definition a special purpose district’s monies in any fund that is not the general fund are considered at least assigned since they are only able to use the monies for the purpose of their government.

3.1.8.31 BARS accounts 3089100 and 5089100 define the beginning and ending unassigned cash and investments as the amounts of cash and investments that are remaining after classifying amounts as nonspendable, restricted, committed, or assigned. Unassigned amounts are technically available for any purpose. The general fund is the only fund that can have a positive unassigned cash and investments balance since all other funds represent a specific purpose for their resources.

External restrictions

3.1.8.40 Any constraints on the purpose or use of resources imposed by an external party constitutes restricted classification. Any cash and investment balance subject to these restrictions must be reported as restricted. Generally the purpose of externally restricted revenue would need to be narrower than the purpose of the fund; unless the government has created a fund for this specific revenue. For example:

Unspent resources contributed by other governments in accordance with an interlocal agreement (contract) for future replacement of a building would be classified as restricted because they are subject to a specific external restriction.

Unspent operating assessments received by a government would not be classified as restricted even though it’s received from an external party. This could be classified as committed, assigned, or unassigned because such resources are not subject to specific restrictions but may be used for any allowable purpose of the government.

Any unspent taxes or other collections restricted by RCW for a specific purpose (e.g., hotel/motel tax, retainage collected or withheld, etc.)

All revenues generated by water sales can only be spent on water related activities and cannot be transferred to general fund to be spent for other governmental purposes. However these revenues can be spent for any water related activity and therefore would be either committed or assigned in the water fund.

Internal commitments

3.1.8.50 If the government’s highest level of authority (e.g., board of commissioners, city council, board of directors, board of supervisors, etc.) imposes specific restrictions on the use of resources through the most binding formal action (resolution or ordinance), the unspent portion at the year-end would be considered committed and may be reported as such.

A motion, plan or stated management intent regarding how resources will be used does not meet criteria for classifying balances as committed because the commitment has to occur at the highest level of authority through the most binding formal action. While commitments may be removed, it would take that same level of authority and level of formal action to do so. For example:

A cash balance in a capital project fund saved for future replacement of a building after verbal direction by city council members at a council meeting would not be classified as committed because the commitment was not established by the most binding formal action (resolution or ordinance).

3.1.8.60 Balances should be classified as committed when the government dedicates resources for a specific purpose, but not if only generic or functional limitations are imposed. For example:

A cash balance in a special revenue fund committed by commissioners for transportation purposes would not be classified as committed balance because the commitment “for transportation” is not specific enough to create limitations.

The limitation should be narrower than the governmental function or even activity. While resources designated for “public safety”, “park and recreation” or “public health” would not be considered committed; the designations for “new dispatch equipment”, “purchase of additional land to expand existing park”, or “cleaning the hazardous area XYZ” would be.

3.1.8.70 Budget documents approved by resolution or ordinance also do not meet criteria for classifying balances as committed because the budget only represents the government’s authorized spending during the period, rather than a constraint on remaining balances at year end. In other words, a budget deals with plans for anticipated revenues and expenditures – resources not yet collected and expenditures not yet incurred – whereas an internal commitment imposes a permanent constraint on currently existing financial resources.

Fund perspective

3.1.8.80 The classification of cash and investments does not reflect any government-wide limitations preventing resources of one fund being spent for purposes of another fund. In other words, any constraints based solely on the purpose of the fund itself would not require classification as restricted. Such constraints imposed by RCW 43.09.210 are both generic and already evident from the fund title, classification and description in the notes. For example:

All revenues generated by water sales can only be spent on water related activities and cannot be transferred to general fund to be spent for other governmental purposes. Within the water fund, unspent proceeds of bonds issued for capital improvement are restricted to this particular project (a specific, externally imposed restriction). In this case, the cash and investments balance classification will include restricted cash and investment for unspent proceeds of bonds and the appropriate committed or assigned balances for everything else that can be spent for any water purposes.

3.1.8.90 Also, resources with external restrictions and internal commitments are classified in either restricted or committed regardless of what fund they are reported in. The external restriction, internal commitments, and subsequent classification of restricted and committed remain tied to the resources no matter which fund they are reported in and if the resources are transferred to other funds. For example:

Unspent hotel/motel tax would be classified as restricted regardless of whether it is accounted for in the general fund, a special revenue fund, or a capital project fund because it is subject to a specific external restriction. The hotel/motel tax resources remains restricted until the resources are fully spent.

If the legislative body passed a resolution or ordinance to set aside (commit) a certain amount of money (from resources that are not restricted or committed) to be used only for a specific tourism purpose, the unspent amount of these monies would be reported as committed no matter which fund the resources are held.

The unassigned classification in the general fund does not mean resources are not subject to any limitations whatsoever. It means that there are no specific external restrictions or internal commitments that constrain spending that money for any allowable use and purpose of the government.

Emergency funds, savings accounts, and rainy day funds

3.1.8.100 Sometimes a legislative body sets aside an amount of money for the purpose of paying expenditures when there is a budgetary shortfall. Since these resources would be available for any purpose or use if needed, they should be classified as unassigned in the general fund unless the resolution stipulates a way that represents an actual constraint. Even if the resolution or ordinance stipulates that the money cannot be spent for any other circumstance, this limitation does not constitute commitment. Purpose refers to the object of spending or usage, rather than circumstances. That is, purpose limitations establish what the cash and investment balance can be spent for, not the circumstances under which the resources can be spent. The same concept applies to emergencies. An emergency is not the purpose of spending but a circumstance when the spending occurs.

3.1.8.110 Sometimes a legislative body creates a “reserve” fund that is a managerial fund in nature through resolution or ordinance to set money aside for a different purpose. These managerial funds (see BARS 3.1.12, Managerial Funds) are generally rolled-up into the general fund for reporting purposes. Creation of a fund and designation of cash and investment balances are two different issues. Merely creating fund to hold money destined for a specific purpose does not automatically classify the entire cash and investment balance as committed or assigned. A managerial fund of a proprietary fund would be rolled-up into its primary operating proprietary fund and therefore is created out of at least assigned cash and investment balances and would continue to be reported as such. The reserve fund may contain resources from many different sources and not all of them may be restricted or committed for the fund objective. Again, the purpose of the fund is separate from the constraints and limitations imposed on all resources designated for such a purpose.

When creating a new fund, please refer to BARS 3.1.7, Fund Accounting and Fund Types for proper fund type use and reporting.

3.1.8.120 An adopted minimum cash and investment balance policy would not meet the criteria to classify ending balances as committed. Such a policy only represents a target amount that the local government believes should be maintained to provide a reasonable level of assurance in the day-to day operations, and not a specific constraint on the purpose or use of any resources. For financial reporting purposes, such a policy may be disclosed, but would not affect classification of ending balances.

Flow of funds assumptions

3.1.8.130 The government may establish a policy for its intended order of use of classification balances when an expenditure is incurred in which restricted, committed, and assigned cash and investment balances can be used to pay the expenditure. In absence of an approved policy it is assumed that the government will use the most restricted cash and investment balance first.

Reporting a negative cash and investment classification balance

3.1.8.140 The classification of cash and investment balances as restricted and committed based on their respective allowable purposes will reduce the available ending cash and investment balances to be classified as assigned, and if in the general fund unassigned, in the fund in which the government is reporting. A government should not spend restricted or committed resources on any activity that does not support the requirement that led to the restricted or committed classification. Additionally, the government can only spend the available balance of restricted and committed resources that are on hand and in cash or investment deposits. Therefore reporting negative restricted or committed cash and investment balances is not allowed. The government must reduce assigned, and if in the general fund unassigned, cash and investment balances to account for payment of expenditures that would (or will) be paid from restricted or committed cash and investment balances that the government is expecting to receive as well as for expenditures paid by the available cash in the fund that were not attributed to the allowable purpose of the restricted or committed classifications.

The classifications of the available cash and investment balances to restricted and committed, as well as the evaluation of the use of available cash in the reported fund, could result in the reporting of a negative cash and investment unassigned balance, if the government has used restricted balances to pay expenses that were not related to the restricted or committed cash and investments that the government has received. The assignment of resources should not create a negative unassigned cash and investment balance, therefore a government should reduce the assigned cash and investment balance down to cover the negative unassigned cash and investment balance. The government is not allowed to report negative assigned cash and investment balances.

On the rare occasion that a government needs to report a negative cash and investment balance in any fund, that negative balance must be classified in the unassigned cash and investment category. This is the only time unassigned can be used outside of the general fund.

3.1. Accounting Principles and Internal Controls

3.1.9 Bank Reconciliations

3.1.9.5 Purpose

The purpose of a bank reconciliation is to compare cash and investment balances and activity (also known as a “proof of cash”) according to the bank to the government’s accounting records and reconcile or follow up on any differences.

Depending on the government’s organization, the bank reconciliation process may be done in stages or parts.  For example, separate reconciliations may be done on different schedules, or by different people, for various government accounts, which are later aggregated as part of a global reconciliation.

Bank reconciliations are a necessary control to safeguard cash against fraud and losses, and to ensure the accuracy of accounting records. A reconciliation of cash activity is necessary to demonstrate that activity is valid and to safeguard against certain types of fraud. A global reconciliation is necessary to effectively compare and reconcile bank accounts to accounting records since individual bank accounts do not normally correspond exactly to individual accounts in the accounting records.  It also demonstrates the completeness of the reconciliation by showing that all bank accounts and all cash accounts in the accounting records are able to be compared.

In this section, “cash” is inclusive of cash and investments. “Bank accounts” and “bank reconciliations” are likewise inclusive of investment accounts (such as certificates of deposit and bonds), zero-balance accounts (such as clearing accounts described in BARS 3.8.6, Use of Payroll and Claims Funds and transmittal accounts described in BARS 3.6.1, Cash Receipting) and accounts held by fiscal agents. For governments that use the County as their treasurer, bank reconciliations would refer to the reconciliation of the government’s accounting records to the county treasurer’s report.

3.1.9.10 Accounting

Accounting records typically track cash by fund and classification. This does not normally result in a one-for-one relationship between bank accounts and general ledger accounts. In absence of specific legal or contractual requirements, is it not necessary for governments to use separate bank accounts to segregate funds so long as accounting records separately track cash balances by fund in sufficient detail.

Money receipted by fiduciaries or third party vendors on behalf of the government should be considered a cash receipt for the government as described in BARS 3.6.1.60, Cash Receipting. If such deposits are remitted to the government, they may need to be identified as a deposit in transit on the bank reconciliation. If the government’s funds are receipted and held by others in a fiduciary capacity, the report from the fiscal agent may need to be treated similar to a bank or county treasurer account during the bank reconciliation process.

Imprest and petty cash funds should be recorded at their authorized amounts as described in BARS 3.8.7, Redeemed Warrants/Cancelled Checks. Since these accounts are subject to separate monthly controls, the authorized balance is typically used as a reconciling item between accounting records and bank accounts.

Funds should not have a negative cash balance in the accounting records. Any negative cash balance in the accounting records should be resolved with an interfund loan as described in BARS 3.9.1, Interfund Loans.

3.1.9.15 Controls

Governments must document a global bank reconciliation that includes reconciliation of both the ending balance of cash as well as cash activity at least monthly.

A global bank reconciliation consists of:

1. Compiling the ending balance, receipts and deposits for the month across all bank statements. This will normally be done by creating a schedule to summarize (or series of schedules that are then aggregated, if the reconciliation is done in parts or stages).

2. Compiling the ending balance, additions and deductions for the month for all cash accounts in the accounting records. This will normally be done by running a report from the accounting system.

3. Identifying reconciling items for differences between bank receipts, deposits and ending balance and the corresponding accounting record revenues, expenditures and ending balance. Reconciling items could include any of the following items:

4. Identifying transactions from the bank accounts need to be recorded in the accounting records. For example, some of these items could include interest earned, bank fees or charges, NSF checks, and unrecorded deposits (such as lockbox transactions, EFTs, or other electronic deposits made directly into the bank account by outside parties).
   
   Accounting records should be updated for all such transactions identified in the bank statements. Unrecorded deposits should be investigated and recorded. If unknown at the time of the reconciliation, they should be recorded to a suspense fund until they can be investigated and resolved as described in BARS 3.6.11, Suspense Funds.

5. Following up on any unreconciled differences. After adjusting for reconciling items, there should be no further differences between bank statements and accounting records.  If there are differences, research should be performed to determine the cause– that is, what bank or accounting record transaction is the source of the difference and what does it represent.  If it is an error in the accounting records, it should be corrected.  If it is a bank error, it should be communicated and resolved with the bank.

Governments should consider more frequent reconciliations, such as daily reconciliations for accounts with a large amount of activity or that are at higher risk for fraud or invalid payments, such as the main checking account for a larger government.

SAO does not prescribe how governments might organize their bank accounts or the corresponding accounting records. However, the number and type of accounts, banking practices, organization of accounting records, and the methods, division and stages of reconciliation established by the government should not represent a barrier to effective control.

3 Accounting

3.1 Accounting Principles and Internal Control

3.1.3 Internal Control

Purpose and Definition of Internal Controls

3.1.3.10 Internal control refers to the means by which management runs its organization and achieves organizational objectives.

The Government Accountability Office (GAO) publishes Standards for Internal Control in the Federal Government, also known as the “Green Book,” which provides a comprehensive conceptual framework for designing, implementing and evaluating a government's system of internal control. The Green Book is not authoritative for Washington governments, but is the basis for this section of the BARS manual and represents a resource for local governments. The Green Book is compatible with similar guidance on internal control published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and is referenced in professional auditing standards and Uniform Guidance for federal grants.

3.1.3.20 Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

• Effectiveness and efficiency of operations performance
   
• Compliance with applicable laws and regulations and safeguarding of public resources
   
• Reliability of financial reporting

3.1.3.30 A government's management and governing body are responsible for its performance, compliance and financial reporting. Therefore, the adequacy of internal controls is to provide reasonable assurance in achieving these objectives is also the responsibility of management, with oversight from the governing body. The governing body has ultimate responsibility for ensuring adequate controls to achieve objectives, even though primary responsibility has been delegated to management. Since management and the governing body are assumed to work in harmony, both parties are collectively referred to as “management” throughout the rest of this section.

The State Auditor's Office is not part of a local government's internal control system and cannot be a replacement or supplement to an adequate system of internal control. In accordance with Washington law, the State Auditor's Office also provides certain guidance, resources and educational materials. Such materials do not relieve management of their responsibility to evaluate the relevance of such information and decide whether and how to apply it in the context of their government. The role of the auditor is to provide independent accountability and assurance to the public and the government's stakeholders. However, this independence assurance, along with any recommendations provided by the auditor, also represents valuable feedback to management.

3.1.3.40 An effective system of internal control is composed of five interrelated components, as follows:

1. Control environment – The tone set by management that influences the control consciousness of staff. Control environment includes communication of integrity and ethical values, commitment to ensure that staff are competent, management's philosophy and operating style, extent of participation by the governing board in scrutinizing activities and holding management accountable, and human resource practices (hiring, organization, development, evaluation, promotion and remedial action).
    
2. Risk assessment – Management's identification and analysis of relevant risks to achievement of its objectives, forming a basis for determining how the risks should be addressed or controlled. Risk assessment includes identification of internal and external risks to the achievement of objectives, such as new contracts or grants, changing regulations and accounting standards, new technology, new personnel, new or discontinued activities and programs, new or discontinued organizational policies and procedures, obsolescence of facilities, and so on. Risk assessment also includes evaluation of risks and determining how to best address them.
    
3. Information and communication – Systems to support the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities. This encompasses the organization's methods of capturing and sharing information as well as its software, including its accounting information systems.
    
4. Control activities – Specific policies or procedures that directly address risks related to the achievement of objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities such as approvals, reviews, reconciliations, segregation of duties, performance measurement, tracking events or assets, etc.
    
5. Monitoring – Management's review of the operation of internal controls over time. Monitoring allows the system of internal controls to be self-sustaining and self-correcting over time. Monitoring is accomplished through ongoing monitoring activities, separate evaluations, or a combination of the two. Ongoing monitoring occurs during the course of operations when management observes controls and can discern whether they were effective. Separate evaluations occur when management reviews and assesses a particular control to determine if it has been effective.

3.1.3.50 Internal control should be viewed as an integral or inherent part of the policies, systems and procedures management uses to operate and oversee the organization. This is not to say effective control will never require additional or incremental effort. Rather, controls exist to provide reasonable assurance about the achievement of objectives and so should be integrated into all the organization's fundamental business processes. Controls are normally most effective when built into the government's infrastructure rather than being treated as supplemental or separate processes. In the same way, implementation and monitoring of internal controls should not be viewed as a singular event, but rather a continuous or iterative process.

3.1.3.60 Since internal control is as fundamental as the objectives the controls relate to, the need for effective control is applicable to all organizations, regardless of size. While small entities may implement internal controls differently than larger ones, effective internal control is still both necessary and possible.

Determining what specific controls to implement

3.1.3.70 It is a management decision as to what specific controls to implement and how such controls are designed and operated.

3.1.3.80 There are many ways to attain effective internal control. Governments and their control needs vary considerably by statutory purpose, regulations, activities and programs, size, organizational structure, contractual and program structures, technology and information systems, expertise of staff and the policies of the governing body. In addition, there are often many different methods or combinations of methods that would result in effective internal control for any given situation. Thus, while all entities should have effective internal control, the specific controls in place may look very different from one government to another.

3.1.3.90 When choosing among different methods of achieving effective control, management often considers the costs and benefits of different control options.

• Costs - Certain controls may be less costly or require less staff resources , or may allow the process to operate faster.
   
• Effect on other control or policy objectives – Certain controls may be able to achieve multiple objectives or may also serve to support the organization's values or operating principles.
   
• Organizational limitations - Control options may be limited by organizational or program policy or structure, expertise of staff, software limitations and other decisions made by management. However, if such factors limit options for effective control to only those that management believes are infeasible or not cost effective, management should consider how it might change the limiting factors rather than ignore the need for effective control.

3.1.3.100 The Washington State Auditor's Office does not require specific controls to be implemented by governments. Management is only required to ensure that whatever controls they choose to implement be adequate to provide reasonable assurance regarding compliance and financial reporting risks. The burden of demonstrating the adequacy of internal controls rests on management, since management is responsible both for the achievement of objectives and the determination of the design and operation of controls.

Controls over Compliance

3.1.3.110 This objective refers to compliance with laws, regulations, contracts, grant agreements and government policies, including the requirement to safeguard public resources against misappropriation, misuse and loss.

3.1.3.120 In meeting this objective, the government should have controls that accomplish the following key functions:

• Identification of requirements – Controls should ensure that requirements are identified and that employees whose actions may affect compliance are aware of applicable requirements. When statutory, regulatory or contractual provisions are unclear, the government should seek clarification through legal counsel, research or communication with regulatory agencies or contracting parties.
   
• Compliance – Controls should prevent non-compliance or detect non-compliance in a timely enough manner for the government to remedy the situation. Such controls vary greatly, depending on the nature of the compliance requirement.
   
• Safeguarding of public resources – Controls should prevent misappropriation or misuse of public resources or detect misappropriation or misuse in a timely manner and assign responsibility to individuals charged with custody of assets. Such controls should cover all receipts and receivables, expenditures and commitments, provisions of goods or services and the safekeeping of all public assets at risk of misappropriation, misuse or loss.

Controls over Financial Reporting

3.1.3.140 This objective refers to fair presentation of financial statements and required schedules in all material respects in accordance with the stated basis of accounting.

3.1.3.150 In meeting this objective, the government should have controls that accomplish the following key functions:

1. Identification of financial events – Controls should ensure financial events and transactions are properly identified and recorded.

2. Properly applying accounting standards – Controls should ensure correct criteria and methodology is applied when accounting for financial events. When the correct method of accounting for or reporting a transaction is unclear, the government should seek clarification by performing research, contracting for accounting assistance, or communicating with the State Auditor's Office or standard setting bodies.

3. Correctly accounting for all financial events – Controls should ensure that:

• Only valid transactions are recorded and reported.
• All transactions occurred during the period are recorded and reported.
• Transactions are recorded and reported at properly valued and calculated amounts.
• Recorded and reported transactions accurately reflect legal rights and obligations.
• Transactions are recorded and reported in the account and fund to which they apply.

4. Preparation of the annual report – Controls should ensure that financial statements and required schedules are properly compiled and prepared from source accounting records. Controls should also ensure correct presentation of statements and schedules.

Limitations of Internal Control

3.1.3.170 No matter how well designed and operated, internal controls cannot provide absolute assurance that the government will achieve its objectives due to inherent limitations. These limitations include the following:

• Judgment – If controls depend on human judgment, the effectiveness of controls may be limited by the experience and qualifications, time available, information available, motivations, and pressures on the person applying the control. Moreover, differences in these factors over time and in different people applying the control may result in inconsistencies in the operation of the control. This limitation, when applicable, can be mitigated through a good control environment, clear policies or instructions, redundant controls, supporting controls such as check figures or exception reports and adequate monitoring of controls.
   
• Breakdowns – Breakdowns could occur due to changes, failure or obsolesce of data, technology, assumptions, procedures, programming or other dependencies that controls may rely upon for effective functioning. This limitation, when applicable, can be mitigated by thorough risk assessment, redundant controls and adequate monitoring of controls.
   
• Collusion – Many controls assume that employees (or certain employees) will not collude. When individuals act together, they may be able to overcome controls. This is typically only a risk when employees have a motivation to overcome controls, such as misappropriation or misuse of public resources. This limitation, when applicable, can be mitigated by a good control environment, redundant controls and adequate monitoring of controls.Control override – Personnel with responsibility to resolve issues identified by controls may decide to ignore or override prescribed policies or procedures. This limitation, when applicable, can be mitigated by a good control environment and adequate monitoring of controls.
   
• Control override – Personnel with responsibility to resolve issues identified by controls may decide to ignore or override prescribed policies or procedures. This limitation, when applicable, can be mitigated by a good control environment and adequate monitoring of controls.
   
• Mistakes – Although internal controls may be designed in such a way as to reduce the likelihood of mistakes, is it always possible that a mistake may be made. This limitation can be mitigated by a good control environment, redundant controls, automated controls, supporting controls such as check-figures or exception reports, and adequate monitoring of controls.
   
• Unforeseen circumstances – Controls may operate incorrectly when faced with unforeseen situations or permutations. This limitation can be mitigated by thorough risk assessment and adequate monitoring of controls.
   
• External factors – Achievement of operational performance objectives (efficiency and effectiveness) may depend on factors outside of the government's control, such as regulation, resource limitations, environmental changes, decisions made by service recipients or stakeholders, actions of key suppliers, customers or program partners, etc. This limitation can be mitigated by thorough risk assessment.

3.1.3.180 Although controls are not an absolute guarantee of success, effective internal controls are expected to consistently and reliably achieve objectives, year after year. However, even well-designed controls have a remote possibility of failure. This possibility increases with the number and primacy of external factors, as is often the case for performance objectives.

3.1.3.190 Ultimately, providing reasonable assurance of achieving compliance and financial reporting objectives is within the government's control and depends primarily on how well controls are designed and operated. Achievement of operational performance objectives also depends in large part on effective internal controls. By implementing effective controls a government can have reasonable assurance that it is doing all it can to meet its objectives.

3 Accounting

3.1 Accounting Principles and Internal Control

3.1.4 Original Supporting Documentation

3.1.4.10 Local governments are responsible for obtaining and ensuring the integrity and retention of the original vouchers, receipts, and other documents – regardless of physical form – necessary to isolate and prove the validity of every transaction relating to the receipt, use and disposition of public funds or property (RCW 43.09.200). This requirement extends to all accounting entries, including interfund transactions or allocations of overhead costs.

In addition, governments are required to comply with public records retention requirements (Chapter 40.14 RCW) and the Local Government Records Retention Schedule published by the Secretary of State in accordance with RCW 40.14.070.

Physical documentation

3.1.4.20 Physical documentation should be recognizable and legible. Internal controls should provide reasonable assurance of the accuracy, durability and availability of physical records.

Electronic documentation

3.1.4.30 Electronic supporting documentation for transactions is appropriate where safeguards exist to ensure that the documentation cannot be changed or altered and that the documentation is retained for as long as is necessary. In cases where source documents are initiated electronically and the local government’s accounting system does not have sufficient controls to ensure the integrity of the data, such electronic records should be printed, reviewed and signed by an appropriate person. The printed records would then be considered the official source document supporting the transaction.

Internal controls ensuring the integrity of data supporting public transactions should include policies and procedures ensuring the accuracy, durability and availability of the data. This would include, but is not limited to, establishing an audit trail and/or system for identification of changes made and users making subsequent modification to the source documents to ensure a proper chain of custody.

See Chapter 434-662 WAC for records retention regulations for electronic records.

Scanned documentation

3.1.4.40 Scanned original documents are acceptable to support the receipt, use and disposition of public funds given the above mentioned controls are in place to ensure their integrity, completeness and accuracy. The original imaged source records cannot be destroyed unless the local government has complied with the Secretary of State’s "Requirements for the Destruction of Non-Archival Paper Records after Imaging “Scanning and Tossing” document. This document can also be found on the Secretary of State’s Records website on the Records Management webpage. Alternatively, the original imaged source records may also be destroyed if the local government’s application requesting early destruction of records after electronic imaging has been approved by the Secretary of State. See Chapter 434-663 WAC.

Authorization of transactions

3.1.4.50 Local governments are responsible for ensuring transactions are properly authorized and have the appropriate type of signature approval. For audit purposes, log-in authentication is an acceptable means of limiting access or segregating duties with user account permissions, establishing accountability and chain of custody for records, and evidencing review or approval. For these controls to be effective, sufficient controls must be in place over user accounts, passwords, sessions, and audit trails or logs.

Physical signature

3.1.4.60 If there is a legal requirement for a signature on an electronic document (i.e. contract, etc.), it can have a digital signature. If a local government chooses to use a digital signature, they are responsible for complying with RCW 1.80.

Facsimile signature

3.1.4.70 Instruments of payments (i.e., check/warrant) can have a legal facsimile signature. A facsimile signature is a reproduction of a signature by engraving, imprinting, stamping or other means. If a local government chooses to use a facsimile signature, they are responsible for complying with Chapter 39.62 RCW.

Non-legal facsimile signature

3.1.4.80 Documents that do not require a legal signature can be authorized by a non-legal facsimile signature. A non-legal facsimile signature is a reproduction of a signature by engraving, imprinting, stamping, or other means.

Log-in identification

3.1.4.90 A number of accounting applications have been developed to use an individual’s log-in identification to authenticate an approval. This can be acceptable if there is no legal requirement for a written signature, if transaction records identify the user, and if there are sufficient user account controls in place to assign accountability for transactions to an individual.

3 Accounting

3.2 Assets

3.2.5 Compensating Balances

3.2.5.10 Some banks may require a government to maintain a predetermined average daily balance in noninterest bearing bank accounts to compensate the bank for handling the government’s bank services.

3.2.5.20 A government’s procurement of banking services will normally consider costs such as fees, minimum balance and compensating balance requirements compared to benefits such as interest rates, locations and services, along with other factors.

3.2.5.30 As part of their procurement of banking services, governments should consider whether the amount of foregone interest revenue is reasonable in relation to fees avoided in order to ensure the agreement does not represent a gift of public funds.

3 Accounting

3.2 Assets

3.2.9 County’s External Investment Pool

This guidance applies only to counties.

3.2.9.10 General accounting principles require the use of fiduciary funds to account and report assets held in a trustee or agency capacity for others. Custodial funds are used to account for situations where the government’s role is purely custodial. They are most commonly used by counties to account for taxes collected on behalf of special purpose districts. Trust funds are subject to a formal trust agreement or an agreement that is acting like a trust. Resources classified as trust or custodial funds cannot be used to support the government’s own programs.

3.2.9.20 In accordance with accounting principles, when counties provide investment services to other entities under RCW 36.29.020 whether through investment pool(s) or by individual investment accounts, the county is considered a sponsoring government and therefore has a fiduciary responsibility for those investments. A county is sponsoring an external investment pool when commingling (pooling) the monies of more than one legally separate entity that are not part of the same reporting entity as the sponsoring government, and invests, on the participant’s behalf. This includes investing in the Local Government Investment Pool when all the monies are held in the county’s name. When a County Treasurer invests any funds in its custody not required for immediate expenditure, whether or not at the request of a district, the County Treasurer is investing on behalf of the districts. The districts’ share in the risk of loss of those investments, so long as the County Treasurer has complied with the statutory requirements in making those investments, and said resources should be reported as an investment pool by the county. Per guidance from the Attorney General’s Office all counties operate a pool.

3.2.9.30 As such, all counties should report investments in either the investment trust fund or the custodial – external investment pool per the criteria located in BARS 3.1.7, Fund Accounting and Fund Types.

3.2.9.40 Reporting investments in both an investment trust fund or the custodial – external investment pool fund and custodial funds, will cause duplicative reporting of the same cash.

3 Accounting

3.2 Assets

3.2.1 Deposits and Investments

Investment Requirements

3.2.1.10 Each municipal corporation should, by action of its governing body, authorize investment of any moneys which are not required for immediate expense and which are in the custody of the county treasurer or other municipal corporation treasurer.

3.2.1.20 State law (primarily Chapter 39.59 RCW, along with Chapter 35.39 RCW for cities and Chapter 36.29 RCW for counties) limits the types of investments allowable for local governments. Limitations on eligible investments reflect preservation of capital and liquidity of funds as primary objectives for investment of public funds. In general, local governments may invest in reasonably safe investments, such as:

• Obligations of the federal government, its agencies and government sponsored organizations
• Obligations of Washington State and local governments
• Obligations of other States and local governments located in other states that have one of the three highest credit ratings of a nationally recognized credit agency at the time of purchase
• The Washington State Treasurer’s Investment Pool (Chapter 43.250 RCW)

Absent statutes specifically authorizing a local government to make an investment in a certain investment type. For example, the following investments are generally not eligible for investment of public funds:

• Corporate stocks
• Corporate bonds
• Foreign government obligations
• Futures, options, swaps and other derivatives
• Real estate or commodities
• Limited partnerships
• Negotiable certificates of deposit
• Certificates of deposit from banks that are not designated as qualified public depositories
• Money market or mutual funds

For a detailed description of eligible and non-eligible investments, along with policy considerations and suggested controls over investing activities, local governments should consult the Office of State Treasurer’s Guide to Public Funds Investing for Local Governments.

In addition to restrictions imposed by state law, investments of local governments may be further restricted by policy, contract or regulation. For example, debt covenants or arbitrage requirements may restrict investment of bond proceeds. Local governments should consult with bond counsel for guidance on such restrictions.

Deposit requirements

3.2.1.60 Except for funds deposited pursuant to a fiscal agency contract with the state fiscal agent or its correspondent bank, no public funds should be deposited in demand or investment deposits except in a public depositary located in this state or as otherwise expressly permitted by statute (RCW 39.58.080).

3.2.1.70 WAC 389-12-020(3) allows public depositaries to arrange for the investment of public funds in certificates of deposit issued by one or more federally insured financial institutions wherever located on behalf of a treasurer provided the funds are initially invested in an authorized Washington public depositary.

3.2.1.80 The total deposits of public funds by any treasurer in any one public depositary may not exceed that depositary’s net worth. If a public depositary’s net worth is reduced, a treasurer may allow public funds on deposit in excess of the reduced net worth to remain until maturity as long as the depositary provides collateral equal to one hundred percent of the excess deposits (RCW 39.58.130). Net worth for public depositaries may be adjusted by the Public Deposit Protection Commission (PDPC) to reflect the depositaries proportional net worth position in Washington State.

3.2.1.90 A financial institution receives designation as a public depositary from the PDPC. This designation is readily verified, either from the financial institution (via a letter of authority from the PDPC) or directly from the PDPC. A quarterly list of each public depositary and its net worth is published on the Washington State Treasurer’s website at www.tre.wa.gov.

3.2.1.100 Washington state and federally chartered credit unions may also accept public deposits within limitations set forth in RCW 39.58.240. State law allows up to two hundred fifty thousand dollars on deposit for any one depositor of public funds in any one credit union. A quarterly list of each approved credit union and its public deposit balances is also available on the Washington State Treasurer’s website.

Accounting for Deposits and Investments

Deposit and investment amounts are both reported together in BARS account 308 (beginning cash and investments) and BARS account 508 (ending cash and investment).

Except for investments held in an investment pool that reports the pooled investments at fair value, all deposits and investments must be reported at either face value or amortized cost. Face value is the stated value of the investment by the issuer. Amortized cost is the value equal to the acquisition cost less the value of principal repayments and the adjustment for the discounts or premiums received at the time of purchase. Governments should establish a policy on when investments should be reported at amortized cost, face value, or fair value. This policy should be disclosed in the Note X - Deposits and Investment.

If accounted for at amortized cost, the purchase of an investment at a premium or discount would require an entry to the Investment Income BARS Code 361.10.00 to account for the premium or discount on the purchase of the investment.

Amortized Cost Example:

Investment in a bond with a face value of $1,000. The government purchases the investment for $950. The cash and investment balance should remain at $1,000. Accounting entry would be as follows:

      Investment purchase (cash and investment account)                            $1,000
                    Cash                                                                                                                    $950
                    Investment income 361.10.00                                                                             50

The bond investment receives annual principal repayments and interest payments. For example, the first payment is $100 of principal plus $10 of interest. Accounting entry would be as follows:

       Cash (principal and interest payment amount)                                      $110
                    Investment maturity (cash and investment account)                               $100
                    Investment income 361.10.00                                                                           10

Accounting for investments in an investment pool that reports at fair value:

Fair value is the estimated price at which an investment would be bought or sold as of the reporting date. Fair value adjustments are performed at least annually at the financial statement reporting date. The investment would recognize unrealized gains or losses on the investment in the 361.10.00 Investment Earnings BARS code. Unrealized gains and losses on investments would only occur with investments held in investment pools reporting at fair value.

3 Accounting

3.2 Assets

3.2.4 Money Held For and By Others (formally Money Held in Trust)

Deposits Held for Customers

3.2.4.10 Governments may require deposits from customers. For example:

• A county or city may require deposits in relation to water, sewer, or garbage utilities.
• A housing authority may require deposits in relation to public housing activities.
• A public utility may require deposits from its customers for either initial or restoration services, provided the deposits are reasonable and not discriminatory.
• A parks and recreation district may require deposits in relation to facility rentals.

These deposits should not be reported in fiduciary funds, they should be reported in the fund where the operational activity is reported in using BARS codes 382.10 and 582.10.

3.2.4.20 Governments should enact policies addressing investment and disposition of interest on deposits by considering legal and contractual requirements and public policy. Governments are encouraged to disclose such policies in applications and official documents related to deposits to ensure a clear mutual understanding of such policies with depositors.

Deposits Held for the Government

3.2.4.30 When a government deposits money into an escrow account, the amount should continue to be recorded as cash on the financial statements, specifically cash held with a fiscal agent. The movement of the money does not represent a financial statement transaction, so should not be reported as an expenditure.

For example, if a government utilizes separate cash accounts in their general ledger, when the government places $50,000 into an escrow account for a down payment towards land the following transactions would be recorded to recognize the movement of the cash. Note: if a government does not utilize separate cash accounts in their general ledger, the following transaction would not be recorded.

Cash held with fiscal agent	$50,000
Cash		$50,000

At the time the escrow money is paid out to the owner of the land, the expenditure is recorded.

For example, when the government finalizes the land purchase and uses the $50,000 escrow cash towards the purchase of land, the following transaction would be recorded.

Capital expenditure	$50,000
Cash held with fiscal agent		$50,000

Investment of superior court trust funds

3.2.4.50 Pursuant to RCW 36.48.090, whenever the clerk of the superior court has money held in trust for any litigant or for any purpose, they should be deposited in a separate fund designated Clerk Trust Fund. This money should not be commingled with any public funds. The clerk is subject to the same investment limitations as the county treasurer (RCW 36.29.020). 

Note: Clerk Trust Funds do not meet the definition of an accounting trust and should not be reported in the fiduciary trusts or any other fiduciary fund. These funds are different from money collected for the Administrative Office of the Courts and the money held awaiting judgement which should be reported as custodial funds (see BARS 3.1.11, Determining Fiduciary Activities to be Reported in Custodial Funds). 

Superior court trust funds interest income

3.2.4.60 If the Clerk Trust Fund principal is $2,000 or more, and a litigant in the matter has filed a written request that the Clerk invest the funds held in trust, the interest income accrued from the date of filing should be held in trust and paid to the beneficiary upon termination of the trust.

All litigants not represented by an attorney and who have $2,000 dollars or more being held by a superior court clerk should receive written notice of the provision for receiving interest income on the funds. 

The clerk should assess a five percent investment service fee on income earned on behalf of beneficiaries. This service fee should be placed in the county current expense fund to be used by the county for general county purposes.

Unless provided otherwise, interest earned on trust investments should be forwarded to the county treasurer as current expense fund revenue. See BARS 3.2.3, Sweeping Interest and Investment Returns into General Fund. 

Investment interest earnings (BARS code 361.10.00) and investment service fees (BARS code 341.42.00) remitted to the county current expense fund should be coded to the revenue account. Moneys to be paid to the county treasurer should be remitted each month together with other remittances.

Superior court accounting requirements

3.2.4.100 Interest paid to litigants may need to be reported to the Internal Revenue Service. Governments should contact the IRS Federal, State and Local Government Division if tax advice is needed.

3.2.4.110 Guidelines for tracking deposits and investments are located at BARS 3.2.1, Deposits and Investments. 

3.2.4.120 All money reported under this section will be reported on the government’s financial statements and included in the bank reconciliations following the guidance located at BARS 3.1.9, Bank Reconciliations. 

3 Accounting

3.2 Assets

3.2.7 Special Assessments

3.2.7.10 Introduction  

Some capital improvements or services provided by local governments are intended primarily to benefit a particular property owner or group of property owners rather than the general citizenry. The costs of providing the capital improvements or services are charged either partially or totally to the property owners who receive the benefit. There are two types of assessments: operating/service assessments and capital assessments.

3.2.7.20 Operating/Service Assessments

Operating/service assessments are for operating activities and do not result in the purchase or construction of capital assets (e.g., street cleaning or snow plowing). The revenues and expenditures should be recorded in the fund that best reflects the nature of the transactions.  

3.2.7.40 Capital Assessment 

Capital assessments enhance the utility, accessibility, or aesthetic value of the affected properties and generally result in improvements or additions to the government’s general capital assets. The project expenditures should be recorded in the fund that best reflects the nature of the transactions. Assessment projects that are an integral part of the government’s enterprise activities should be recognized in the enterprise fund.

3.2.7.50 Special Assessment Debt 

Special assessment debt for which the government is obligated in some manner, should be reported on the Schedule of Liabilities (Schedule 09).

The phrase obligated in some manner is defined very broadly and includes all situations other than those in which (a) the government is prohibited (by constitution, charter, statute, ordinance, or contract) from assuming the debt in the event of default by the property owner or (b) the government is not legally liable for assuming the debt and makes no statement, or gives no indication, that it will, or may, honor the debt in the event of default. It would be very rare, if ever, that special assessment debt should not meet these criteria.

3.2.7.60 Debt Service

If the special assessment is related to governmental fund activities, the long-term debt service transactions may be recorded in a debt service fund. Any debt service that is an obligation of an enterprise fund or expected to be repaid from an enterprise fund revenue should be reported in the enterprise fund. Short-term debt service expenditures should be recognized in the fund recording the associated debt.

3.2.7.70 Capital Expenditures

The capital expenditures should be recorded in the fund that the special assessment is related to (for example, the general fund, a capital project fund, or enterprise fund).

3.2.7.80 Budgeting

Capital improvements funded by special assessments should be budgeted on a project basis. Although improvement district statutes vary, they normally require formal adoption of an assessment roll. The LID formation ordinance is an adequate budget for the life of the LID. The amount of the assessment roll is determined by the estimated costs of construction and debt service, which are approved by the same action. If construction costs exceed estimates, legislative approval is normally required. That approval should be recorded as a budget modification.

3.2.7.90 References

	Authority to Establish and Assess for	RCW Reference
Cities and Towns	LID & ULID	Chapter 35.43 RCW thru Chapter 35.56 RCW
Counties/County Roads	CRID	Chapter 36.88 RCW
Fire Districts	LID & ULID	Chapter 52.20 RCW
Port Districts	LID & ULID	Chapter 53.08 RCW
Irrigation Districts	LID & ULID	RCW 87.03.480 thru RCW 87.03.527
Irrigation Districts	O&M	RCW 87.03.240 thru RCW 87.03.420
Park and Recreation Districts	LID	RCW 36.69.200 thru RCW 36.69.305
Water/Sewer Districts	ULID	Chapter 57.16 RCW
Counties Sewerage, Water and Drainage System	LID & ULID	RCW 36.94.220 thru RCW 36.94.400
Flood Control Zone Districts	LID & ULID	RCW 86.15.160, RCW 86.15.165
Flood Control Districts	O&M	RCW 86.09.380 thru RCW 86.09.517
Diking Districts	O&M	RCW 85.05.270, RCW 85.05.355, RCW 85.18.150
Drainage Districts	O&M	RCW 85.06.125, RCW 85.38.140 thru RCW 85.38.170
Diking, Drainage and Sewage Improve. Dist.	O&M	RCW 85.08.410, RCW 85.08.420, RCW 85.08.480, Chapter 85.16 RCW
Public Utility Districts	ULID	RCW 54.16.120 thru RCW 54.16.170

3 Accounting

3.2 Assets

3.2.3 Sweeping Interest and Investment Returns into General Fund

This guidance applies only to cities and counties.

3.2.3.10 Based on the current economic environment in which they operate, local governments are actively looking for ways to generate additional unrestricted revenues, so often there are questions regarding the transfer of interest income associated with certain revenues to the general fund and/or other funds.

3.2.3.20 The answers to these questions may be “Yes: or “No”, based on the statutory language that authorized the imposition of taxes and levies or the distribution of fees and taxes by the state. These answers are also affected by the type of entity receiving the revenue.

Counties

3.2.3.30 County legislative authorities have the power to direct the investment of county funds, and when they do so, the interest earned stays with the original fund. If the legislative authority does not provide this direction RCW 36.29.020 allows a county treasurer to allocate the interest and other income earned on the investment of a county’s own funds into county general fund.

3.2.3.40 As discussed in the AGO 2010 No. 10, the three statutes listed below are examples of a specific legislative intent which overrides the general authorization granted counties in RCW 36.29.020.

• RCW 73.08.080 – Veterans’ assistance fund
• RCW 81.100.080 – High occupancy vehicle system fund
• RCW 41.16.050 – Firefighters’ pension fund

3.2.3.50 Again, the statutes listed above are not meant to provide an exhaustive list of all revenues where the allocation of interest is restricted. It is the county’s responsibility to carefully review the statutory language governing a particular revenue source to determine restrictions related to interest and other investment income.

Cities

3.2.3.60 Cities may transfer interest income to their general fund if the transfer is in compliance with RCW 35.39.034 (non-code cities) or RCW 35A.40.050 (code cities).

3 Accounting

3.3 Capital Assets

3.3.8 Capital Assets Management

Quick Links

3.3.8.10 Definitions

3.3.8.20 Reporting capital asset transactions

3.3.8.30 General tracking requirements

3.3.8.40 Establishing capital assets policies

3.3.8.50 Small and attractive assets

3.3.8.60 Capital asset tracking system

3.3.8.70 Uniform Guidance - Property management

3.3.8.80 Improvements, repairs and maintenance

3.3.8.90 Leased asset improvements/leasehold improvements

3.3.8.100 Jointly acquired or constructed assets

Footnotes

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3.3.8.10 Definitions

Accountability means the obligation to demonstrate good management of or control over those matters for which the government is responsible.

Capital assets are real and personal property used in operations, that are at or above the capitalization threshold and in which the government intends to use or keep for more than one year. Capital assets include land and land rights; buildings, fixtures, and furniture; infrastructure assets, intangible assets (such right-to-use lease, SBITA and PPP assets, right-of-way easements, patents, etc.), equipment, machinery, vehicles, and tools.

Capital assets management system is the set of written policies and procedures used to control a government's capital assets and demonstrate accountability. Public officials have several broad responsibilities with respect to capital assets such as tracking assets for accountability purposes; maintaining records for insurance purposes; ensuring assets are safeguarded from loss, waste, damage, or neglect; for compliance purposes such as when purchased with federal funds; and long-term capital budgeting and planning.

Capitalize means to report an expenditure for real and personal property or intangible assets as a capital outlay. These expenditure transactions are coded to 594 and 595 account codes.

Capitalization threshold is a dollar amount set in a formal policy defining when an item with more than one or more years of usefulness will be classified as a capital asset.

Impairment is the significant and unexpected decrease in the service capacity of a capital asset that is expected to remain in service. Reporting impairment may qualify as an extraordinary or special item [1]. If the impairment does not meet the definition of extraordinary or special item any compensation received for the impairment should be reported under BARS code 395.20.

Physical inventory is a procedure where the existence of assets on the inventory list is confirmed by physically observing the assets at their location in the field.

Small and attractive assets are assets that last longer than one year, but do not qualify as capital assets. They are less than the capitalization threshold and may be susceptible to theft or misuse.

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3.3.8.20 Reporting capital asset transactions

Cash basis accounting only reports inflows and outflows of cash therefore, the financial reporting requirements for capital assets are limited. When a capital asset is purchased, the entire expenditure is recognized in the period as capital outlay when the cash outflow occurs. Because the entire asset cost is reported when it was purchased, the reporting of depreciation accounts is not appropriate.

The determination of when a purchased item is classified as a capital asset and reported as a capital outlay, is dependent upon the capitalization threshold established in the policy of the government. Each government should establish a formal policy that addresses capitalization thresholds.

When constructing an asset, expenses should start being recorded as a capital outlay when the government knows that the project is going to occur, and record only costs that are directly attributable to a specific asset. Exclude costs related to studies to determine feasibility of the project or the best location for the asset or project. Other costs such as engineering, architectural and other ancillary fees related to acquiring, or putting in service, a specific asset or piece of property should be capitalized. Costs clearly related to the acquisition or construction of capital assets that are shared across more than one capital project should be capitalized. These costs should be allocated to the individual projects.

In the event that a cash basis government receives an asset and no cash is exchanged (donations, contributions, or similar type exchange), there is not a reportable financial transaction. Exceptions to this are discussed in BARS 3.1.10.40, Accounting Principles. This does not remove the responsibility of the government from its stewardship of public resources. Entities must have policies and procedures in place to track, demonstrate accountability and ensure security of their capital assets.

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3.3.8.30 General tracking requirements

Specific capital asset tracking requirements are disclosed below, BARS 3.3.8.60. In addition, the federal government has issued property management requirements that may apply to governments that receive federal financial assistance. Title 2 of the Code of Federal Regulations (CFR) sections 200.310-316 outlines specific requirements related to real property, equipment, supplies and intangible property purchased with federal award funds. Note that these requirements involve broad stewardship responsibilities and specific accounting records.

The duty to make certain that public property is adequately protected and that its use is properly managed is one of the fundamental responsibilities of government officials. Local governments with capital assets should develop policies and procedures for management of these public resources. At a minimum, the policies should be reviewed and approved by the governing body. Once a policy is adopted, it should be periodically reviewed and updated to ensure it meets the needs of the local government.

The following are items the government must consider when developing policies for tracking and safeguarding their capital assets.

• Capitalization threshold – This threshold defines the dollar amount at which the purchase of an asset with a useful life of one year or more will be classified as a capital asset.  A government may establish a single capitalization threshold for all capital assets or different capitalization thresholds for different classes of assets. The threshold should be established at a small enough level such that the assets excluded would be clearly insignificant to financial reporting in aggregate. In establishing a threshold, governments may consider the types and groups of capital assets they own and management information needs.  

Local governments that are recipients of federal grants should ensure capital asset thresholds will allow the government to meet federal requirements in the 2 CFR §200.313 related to tracking assets purchased with federal funds. Note the April 22, 2024 revisions to the Uniform Guidance increased in the capitalization threshold from $5,000 to $10,000.  The revisions to the administrative requirements and cost principles are effective to new federal awards executed by a federal agency on or after October 1, 2024.

• Inventory requirements – Policies should require inventories at reasonable intervals to verify the existence and condition of capital assets. The policy should define the categories or types and threshold of assets to be inventoried. These policies should require an inventory interval based on the nature of assets, number of assets and extent of decentralization. The policy should also assign overall responsibility for conducting the inventory – ideally by personnel other than those charged with custody of the assets. The policy should include how to follow up on damaged or missing assets, including when inventory results or issues are communicated to the governing body. The policy should direct losses of public resources to be reported to our office, as required by state law. Inventory policies should conform to any statutory or regulatory requirements, such as the requirement for counties to inventory all capital assets per RCW 36.32.210 or the federal requirement for assets purchased with federal award funds to be inventoried at least once every two years.
   
• Recordkeeping – Policies should address how the capital assets will be tracked and what records will be maintained for operational and accountability purposes. Governments should maintain records of what they own, where it is located, the condition, and who is responsible for the asset. Records should be sufficient to prove any losses for insurance purposes. Inventory and maintenance records will confirm that a lost or damaged asset has been in use recently, which will support the validity and timeliness of a theft or damage report. Specific information captured may vary by type of asset.
   
• Disposition procedures – To the extent procedures are not defined by statute (such as Chapter 39.33 RCW for intergovernmental disposition of property, or property sales for ports in Chapter 53.08 RCW, etc.), policies should define authority and authorized procedures for determining assets require replacement or are otherwise surplus, and their subsequent disposition.
   
• Asset replacement – Policies should provide sufficient direction on when assets should be replaced. Replacement may be based on a set schedule, based on specified conditions, or delegated to specified staff positions or groups to determine or recommend on an asset-by-asset basis. Replacement policies often differ by asset type and should be established to align with and support the government’s capital budgeting and planning process.

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3.3.8.50 Small and attractive assets

These are assets that are below the government’s capitalization threshold for reporting purposes and last longer than a year but may be susceptible to theft or misuse. Each government should perform an assessment to identify those assets that are particularly at risk or that otherwise need to be tracked for operational purposes.

Governments should implement specific measures to track and control these assets to minimize identified risks, as appropriate for the nature of the assets, value of the assets, and risks. Controls may range from basic measures such as policies, tagging, assigned custody, restricted access or other physical controls - to limited systems such as check-out systems or reserve inventories (where only items not in use are tracked) – to comprehensive tracking and inventory controls such as that is done for capital assets (compete tracking lists, periodic physical inventories, see below for more information). Governments should also consider the cost/benefit of tracking certain types of assets and the resources it has available when establishing control measures, as compared to the risks involved.

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3.3.8.60 Capital asset tracking system

When a government has capital assets it must establish and maintain a tracking system for them. It may be maintained using either a computerized or manual system.

The tracking system must adhere to the formal asset policies approved by the governing body.

It must include following information, as applicable:

1) Inventory list containing capital assets owned by the government.

2) Individual information record for each capital asset:

• Acquisition information, including references to source documents and acquisition dates
• Name and detailed description sufficient to define and identify the asset, including any identifying numbers or legal description
• Location of the asset
• Custodian responsible for the asset
• Cost of the asset/source of funding (federal award, etc.)
• Estimated life
• Condition of the asset
• Identifying number for the asset
• Disposal information, including date, method of disposal, and method used to determine disposal value

3) A reconciliation of the capital assets list and individual supporting asset records at least once per year to ensure the information is complete and accurate.

4) Adequate internal controls over additions and deletions to the capital asset tracking system to ensure the capital asset tracking system is kept up-to-date and accurately reflects all activity.

5) A method to track changes in custody and assigned responsibility for the assets.

6) Performance of a physical inventory, at reasonable intervals, as established by the government's policy.

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3.3.8.70 Uniform guidance - property management

Capital assets purchased with federal funds are subject to federal property standards. The federal requirements are found in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements of Federal Awards (Uniform Guidance - 2 CFR §§200.310-316). They apply whether the assets are purchased in whole or in part with federal resources and are in addition to the accountability requirement prescribed by our office. The federal rules are in effect during the time the asset is owned by the government until official disposition has occurred. Also, government should be aware some federal agencies may publish deviations from the Uniform Guidance due to statutory requirements.  Note the April 22, 2024 revisions to the Uniform Guidance increased in the capitalization threshold from $5,000 to $10,000.  The revisions to the administrative requirements and cost principles are effective to new federal awards executed by a federal agency on or after October 1, 2024.   

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3.3.8.80 Improvements, repairs and maintenance

Costs related to an existing asset need to be carefully evaluated as they are incurred to determine whether they should be expensed or capitalized. This evaluation will depend on the nature of the cost as well as the government’s policy.

Routine repair and maintenance costs should be reported to normal, functional expenditure BARS codes. For example, expenditures incurred to repair a piece of equipment that was damaged during shipment should be expensed.

Costs that represent betterments, such as those that increase service capacity or efficiency should be reported as capital expenditure using the BARS 594 or 595 codes. For example, an increase in service capacity is a road that is widened to include another lane. An example of an increase in efficiency might be the ability to raise the speed limit of a road due to the addition of entrance or exit ramps. To the extent that a project is partially a betterment, the amount of the betterment should be estimated and capitalized.

Costs that extend useful life should also be capitalized. For example, a road that is fully depreciated undergoes significant reconstruction. The costs of the reconstruction should be capitalized.

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3.3.8.90 Leased asset improvements/leasehold improvements

Costs related to improvements to an asset where the government has a long term lease agreement should be evaluated to determine if the costs should be expensed or capitalized. This evaluation will be dependent on the nature of the costs and the applicable contracts or agreements.

A government who is leasing the asset has a leasehold improvement when modifications are made to leased property to better suit the government’s specific needs. If the modifications are at or above the government’s capitalization threshold and will be utilized for more than one year, the expenditures should be coded to 594 and 595 account codes.

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3.3.8.100 Jointly acquired or constructed assets

Governments may jointly acquire or construct an asset, however only one government may own and report the asset. Determining when to report a capital outlay expenditure, a cash basis government would need to determine who owns the asset and what the outlay is supporting. The contracts and agreements supporting the acquisition or construction of the asset should assist in this determination. A capital outlay should only be reported if the outlay meets the capital asset requirements as discussed throughout this section.

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Footnote

[1] Special items result from significant transactions or other events within the control of management that are either unusual in nature or infrequent in occurrence. Extraordinary items are both unusual in nature and infrequent in occurrence.

Return to Reference 1

3 Accounting

3.4 Liabilities

3.4.6 Arbitrage Rebates

Overview

3.4.6.10 Any local government may engage in arbitrage by borrowing funds at one interest rate and investing those same funds at a higher rate. The primary reason for arbitrage is that the rates of interest paid on tax exempt debt normally are lower than those paid on taxable securities and it is possible for local governments to profit from this disparity in interest by temporarily reinvesting the proceeds of lower interest tax exempt borrowings in higher yielding taxable securities. The proceeds from those transactions are called arbitrage earnings.

3.4.6.20 When governments reinvest tax-exempt proceeds at a higher, taxable yield, the excess earnings must be remitted to the federal government as arbitrage rebate.  There are some important exceptions to this general rule. These special situations are known as safe harbors (e.g., small issuer safe harbor, six-month expenditure safe harbor, eighteen-month expenditure safe harbor, twenty-four month expenditure safe harbor).

3.4.6.30 If a government fails to qualify for one of the safe harbors, it must calculate and rebate arbitrage earnings to the federal government. The tax code requires that arbitrage amounts be calculated and remitted every five years and upon maturity of the debt. For accounting and reporting, the calculation should be performed annually to determine whether a liability needs to be reported on the Schedule of Liabilities (Schedule 09), even if payment is not made to the federal government.

Financial accounting and reporting for arbitrage

3.4.6.40 Rebatable arbitrage should not be recognized in cash basis financial statements as an expenditure until the rebatable amounts are actually paid to the federal government. 

3.4.6.50 Each year a liability may be reported on the Schedule 09 with an appropriate increase or decrease as the government calculates the arbitrage rebate annually with a full reduction of this liability in the year of payment. When calculating the amount of the liability, it should be remembered that excess earnings of one year may be offset totally or in part by lesser earnings in a subsequent year. Therefore, the ending liability amount reported on the Schedule 09 for the year should be only the current years calculated amount of the estimated future payment to the federal government.

3.4.6.60 When the arbitrage rebate is paid to the federal government, the reduction of cash and recognition of an expenditure would be reported in the appropriate fund.

            592PP80                        Expenditures – Arbitrage Rebate Tax               $1,000
                                    111.10                        Cash                                                                     $1,000
            (To record the payment of arbitrage rebate.)

3 Accounting 

3.4 Liabilities 

3.4.23 Compensated Absences 

3.4.23.10 Compensated Absences are defined as leave for which employees may receive cash payments when the leave is used for time off, other cash payments like unused leave paid upon termination of employment and non-cash settlements like conversion to defined benefit post-employment benefits.  

Termination of employment refers to the end of an employee’s active service no matter the reason. This category would include estimated leave paid at separation, retirement, or death. 

3.4.23.20 There are two types of leave that are included in the liability calculation: 

• Leave that has not been used 
   
• Leave that has been used, but not paid  

3.4.23.30 Leave that has not been used should be included in the liability calculation if the following criteria is met: 

• The leave is attributable to services already rendered (the employee earned the hours over the course of employment) 

• The leave accumulates (carries over from one fiscal year to another) 

• There is a greater than 50 percent likelihood that the leave will be used for time off or otherwise paid in cash or settled through noncash means. 

3.4.23.35 To determine if leave is more likely than not to be paid, governments should review their compensated absence policy and historical information on leave usage.  

3.4.23.40 Additionally, governments should verify if they have specific criteria for paying unused leave balances for specific events at the end of employment (for example: the government only pays at retirement or there are additional benefits due to death in the line of duty, etc.). When this scenario has been identified then the government would only calculate the unused balance based on the likelihood of that payment.  

3.4.23.50 Leave that is dependent upon occurrence of a sporadic event that affects a relatively small proportion of employees should not be estimated or recognized until that leave commences, including any scheduled leave that carries over the fiscal year-end. Some examples would be: 

• Military leave

• Bereavement leave 

• Jury duty 

• Parental leave 

3.4.23.60 Unlimited leave policies are excluded until commencement except for leave that has been used, but not yet paid.  

3.4.23.70 Governments should calculate each leave type separately (sick, vacation, PTO, etc.) and may further separate leave types based on other factors such as employee type, length of employment, bargaining agreements, scaled payout agreements, etc. These groupings must be maintained throughout the calculation of the compensated absence liability and should be applied consistently over reporting years. 

3.4.23.80 The calculated compensated absence liability should include any salary related payments related to the leave balances included in the calculation. Salary related payments are additional costs that are directly and incrementally associated with the payment. Directly associated is defined as amounts of the payment that depend on the amount of salary being paid. Incrementally associated with is defined as payments that the government will make in addition to the payment of the salary. Examples of salary related payments include: 

• Payroll taxes 

• Health savings accounts (HSAs), flexible spending accounts (FSAs), etc. 

• Nonsponsored defined contribution retirement plans 

3.4.23.90 Department of Retirement Systems plan contributions would not be included in salary related payments. 

3.4.23.100 Components of the Calculation of the Compensated Absence Liability - 

3.4.23.110 Leave that has been used, but not paid should be calculated at exact hours taken and the pay rate in which those hours will be settled plus any salary related payments. 

3.4.23.120 Leave that has not been used should be calculated based on the government’s compensated absence policy. Note: This calculation should not exceed the year-end accrued leave balances. 

3.4.23.130 Common leave policies - examples 

3.4.23.131 If the government’s compensated absence policy is to payout 100% of leave balances. 

1. Take the accrued leave balance and calculate the liability amount using the pay rate at fiscal year-end including salary related payments. 

3.4.23.132 If the government’s compensated absence policy is to not payout any leave balances at termination of employment. 

1. Estimate the leave usage that will be used in a future period by the employee or group of employees. 

2. Verify that the estimated usage is not over the accrued leave balance. 

3. Using the hours calculated in Step 1, calculate the liability amount using the pay rate at fiscal year-end including salary related payments. 

3.4.23.133 If the government’s compensated absence policy includes payment due to termination of employment at current pay rate and less than 100% of the accrued hours. 

1. Estimate the leave usage that will be used in a future period by the employee or group of employees. 

2. Subtract the estimated calculated hours in Step 1 from the accrued leave balance. Note: If the estimate usage is equal to or greater than the accrued leave balance then only use the accrued leave balance and skip to Step 4. 

3. Use the remaining balance in Step 2 to calculate the termination amount per policy. Include any reductions in hours in this calculation (for example, policy states that 25% of the leave balance is paid). 

4. Using the hours calculated in Step 1 and Step 3, calculate the liability amount using the pay rate at fiscal year-end including salary related payments. 

5. Add the amounts calculated in Step 4 together. 

3.4.23.134 If the government’s compensated absence policy includes payment due to termination of employment paid at a different pay rate and 100% of the hours. 

1. Estimate the leave usage that will be used in a future period by the employee or group of employees. 

2. Subtract the estimated calculated hours in Step 1 from the accrued leave balance. Note: If the estimate usage is equal to or greater than the accrued leave balance then only use the accrued leave balance and skip to Step 4. 

3. Use the remaining balance in Step 2 to calculate the termination amount per policy.  

4. Using the hours calculated in Step 1 and Step 3 calculate the liability amount using the pay rate that the hours will be settled at, including salary related payments:
   
   a. Termination pay: policy states that the balance will be paid at 25% of the current pay rate
   b. Usage pay: the current pay rate for leave expected to be used in a future period.

5. Add the amounts calculated in Step 4 together. 

3.4.23.135 If the government’s compensated absence policy includes payment due to termination of employment paid at current pay rate with a cap of hours paid. 

1. Estimate the leave usage that will be used in a future period by the employee or group of employees. 

2. Subtract the estimated calculated hours in Step 1 from the accrued leave balance.  Note: If the estimate usage is equal to or greater than the accrued leave balance then only use the accrued leave balance and skip to Step 5.  

3. Use the remaining balance in Step 2 to calculate the termination amount per policy. 

4. Review the termination amount and any amount over the cap should be adjusted to the cap. 

5. Using the hours calculated in Step 1 and Step 3, with any adjustment from Step 4, calculate the liability amount using the pay rate at fiscal year-end including salary related payments. 

6. Add the amounts calculated in Step 5 together. 

3.4.23.140 These calculations must be done for each leave type. The amounts calculated should be added together and reported on the Schedule of Liabilities (Schedule 09) under liability code 259.12 and disclosed at Note X – Long-Term Liabilities. 

3 Accounting

3.4 Liabilities

3.4.18 Environmental and Certain Asset Retirement Liabilities

3.4.18.10 Many of governments’ activities have a direct impact on environment and, in some cases, they may contaminate it or create potential for contamination. State and federal laws may require significant remediation work necessary to restore a property or properly dispose of hazardous materials, such as, removing underground fuel storage tanks, cleanup and removal of sewage lagoon, etc. or work to eliminate a potential adverse impact, such as decommissioning wells, proper disposal of radioactive materials, etc. These situations may result in environmental liabilities and certain asset retirement liabilities which are reportable on the Schedule 09 and in various note disclosures.

3.4.18.20 Pollution remediation may be unplanned and results from accidents, improper use of an asset (e.g., oil spill, etc.) or might be inherent for the type of assets used (e.g., x-ray machines, etc.). In some cases contamination occurred in the past on government owned property that the municipality may now be obligated to clean up. Pollution remediation liabilities include obligations to pay for activities for pre-cleanup (such as site assessment), clean-up (neutralization, containment, or removal), oversight or enforcement of laws, and post remediation monitoring related to contamination.

3.4.18.30 Certain Asset Retirement liabilities are an obligation which is legally enforceable, associated with the retirement of a tangible capital asset. Legally enforceable refers to some legal requirement by a third party such as due to federal, state, or local laws or regulations; a legally binding contract with a third party, or issuance of a court judgement. Due to these legally enforceable liabilities, other parties could compel the government to fulfill an asset retirement obligation, leaving the government with little or no discretion to avoid the obligation.

3.4.18.40 The government must disclose environmental liabilities; see sample note disclosure. If the amount of environmental liabilities can be reasonably estimated and it’s probable that the government will be obligated to pay it, the amount should be reported on the Schedule 09 (ID No. 263.93). The government can use current costs to perform the required work, or present value of future costs. The federal (e.g., EPA, FERC, etc.) and state agencies (e.g., Department of Ecology, Department of Natural Resources, Department of Health, etc.) provide resources to help governments’ determining possible future cost of related remediation. This estimate must be revisited at least on an annual basis to adjust the liability for inflation or deflation and to evaluate whether there has been a significant change in the estimated costs associated with the liability.

3.4.18.45 The government must disclose an asset retirement liability once the retirement of the asset is reasonably certain; see sample note disclosure. Indicators of certainty would be a date stated in a contract, governing board approval to decommission or otherwise retire the asset, a legal judgement with a stated timeframe for retirement, etc. The amount should be reported on the Schedule 09 (ID No. 263.93).

The asset retirement liability is the estimated current cost of what it would take to meet the legal obligation – taking in all available evidence at a reasonable cost. The current cost should include all legally required costs to be incurred, as if this liability were to be taken care of at the end of the reporting period. This estimate must be revisited at least annually, to adjust the asset retirement liability for inflation or deflation and to evaluate whether there has been a significant change in the estimated costs associated with the liability.

3.4.18.50 The most common indicators of a governments’ environmental and asset retirement liabilities are:

• Government must take an action due to imminent endangerment of public health;
• Government is or will be named as a party responsible for a remediation;
• Government is or will be named in the lawsuit requiring a remediation;
• Government started or legally obligated itself for remediation;
• Government will retire certain capital assets with special disposal or decommissioning obligations as subject to local, state and federal environmental laws and regulations or due to contractual obligations or other legally binding situations.
  • For example, if a city decides to retire a sewer lagoon, the asset cannot simply be abandoned due to the risk to groundwater. Therefore, a city might incur significant costs to decommission it. Recognition occurs on the Schedule 09 when there is certainty the asset will be retired and when costs can be estimated. The most common assets subject to such reporting are dams, wells, wastewater treatment lagoons, radioactive equipment, sand/gravel/etc. mining areas, underground storage tanks, etc.

3.4.18.60 The above requirements do not apply to landfills which are discussed in BARS 3.4.10, Solid Waste Utilities: Closure and Postclosure Cost Accounting.

3 Accounting

3.4 Liabilities

3.4.7 Intergovernmental and Forgivable Loans

3.4.7.1 Intergovernmental loans

In general, any loans to other governments will be scrutinized for permanent diversion of funds. However, loans to other governments may occur in lieu of a transfer or contribution when activity is related to a public or proprietary purpose of the government. For example, since provision of affordable housing is a public purpose of a city, a city could lend money to a housing authority in support of an affordable housing project within the city’s boundaries. Alternatively, the city could lend money to the authority on favorable terms, or with a partial or full forgiveness clause.

RCW 39.59.040 allows for investment in certain registered warrants with monies available for investment. However, to be considered an investment, governments must meet all the requirements in RCW 39.59.040, otherwise registered warrants will be considered an intergovernmental loan. Also, a direct loan or investment with the intent to donate will be scrutinized for a permanent diversion of funds.

Lender accounting for intergovernmental loans

Loan issued:             

518.63.40 Financial Assistance and Other Distributions	$100,000
Cash		$100,000

Loan repaid:             

Cash	$102,000
337.00.00 Local Grants and Other Payments		$100,000
361.40.00 Other Interest		$2,000

Recipient Accounting for Intergovernmental Loans

Loan issued:

Cash	$100,000
391.80.00 Intergovernmental Loans		$100,000

Loan repaid:         

591.XX.70 Debt Service Principal	$100,000
592.XX.80 Debt Service Interest	$2,000
Cash		$102,000

This should also be reported as a liability on the recipient’s Schedule of Liabilities (Schedule 09).

3.4.7.2 Intergovernmental loans as a fiscal agent

Lending of funds between a primary government and the fiduciary funds is considered an intergovernmental loan.

If a government acts as a fiscal agent for another government or organization, then allowing a negative cash balance is effectively lending to that other organization. Additionally, the issuance of registered interest-bearing warrants as described in BARS 3.8.6.30, Use of Payroll and Claims Funds are considered intergovernmental loans.

The governing body of the primary government may authorize a policy for handling negative cash balances administratively that provides for appropriate terms and interest in its role as fiscal agent.

However, if negative cash balances are significant or persist beyond 60 days in substance, then procedures described in BARS 3.4.7.1 (above) should be followed.

3.4.7.3 Forgivable loans

A loan with a forgiveness clause is a contract that contains provisions for the loan to be forgiven if certain criteria is met. For example, a lender may provide a loan to a government to construct a building and allow for forgiveness of the loan if the building is used for low-income housing for 40 years. Most loans with forgiveness clauses do not require any payments for a specified time, but some can require regular payments or interest-only payments. Transactions should be reported as loans if a note payable or loan contract is outstanding, even if the lender does not require payments and the loan contains a forgiveness clause that the government expects to eventually meet.

Loans with forgiveness clauses should be accounted for as debt proceeds when received. Terms of these transactions need to be presented in the notes to the financial statements. The disclosures should include the assets acquired with the resources, conditions to be met for the transaction to become a grant, what circumstances require repayment, and the amount to be repaid (e.g., interest, appreciated value, etc.). When a government has satisfied the criteria for the loan to be forgiven, grant revenue can be recognized along with a loan repayment.

A recoverable grant is a contract where the grantor can require repayment if the government fails to fulfill the requirements. Some recoverable grant contracts also require return of the appreciation in value of the asset as well as the original funding amount. Recoverable grants are non-exchange transactions and should be reported as revenue when the eligibility requirements are met. If the government has received a recoverable grant, the conditions for recoverability must be disclosed in the notes to the financial statements. The items requiring disclosure include: the asset the grantor has an interest in, the amount the grantor can require to be returned, and the conditions that trigger return of the grantor interest.

Lender Accounting for Forgivable Loans

Loan issued:

518.63.40 Financial Assistance and Other Distributions	$100,000
Cash		$100,000

Loan forgiven:    

Functional Expense	$100,000
337.00.00 Local Grants and Other Payments		$100,000

When the loan is forgiven, the lending government is forgoing a revenue stream in exchange for the recipient providing the services specified in the contract. As noted in BARS 3.1.7.40, Basis of Accounting, when a government forgoes a revenue stream in exchange for a reduction in expenses, the government must still record the revenue and expense.

The revenue will always be BARS Code 337.00.00 for Local Grants and Other Payments because the government is forgoing a repayment of the debt. The expense depends on what service was provided by the recipient government.

For example, if a City loans $100,000 to a Housing Authority to set up a low-income housing program. The loan will be forgiven if the Housing Authority provides renter assistance service for 3 years. Once the loan is forgiven, the City will record an expense to BARS Code 551.00.00 Public Housing Services.

Recipient Accounting for Forgivable Loans

Loan issued:

Cash	$100,000
391.XX.00 Loan Proceeds		$100,000

Loan forgiven:

591.XX.70 Debt Service Principal	$100,000
33X.XX.00 Grant Proceeds		$100,000

3.4.7.4 Revolving Loans

Some federal agencies award local governments funding to be used for a revolving loan program (such as HUD). In a revolving loan program, the local government receives funding from the awarding agency. They use the award funding to give loans to individuals, organizations, or business for a specific purpose. Those individuals, organizations, and businesses repay the loans and the local government uses those receipts to create new loans.

Grants received from awarding agency:         

Cash	$100,000
33X.XX.00 Grant Revenue		$100,000

The exact grant code will depend on which agency awarded the funding and whether it was a direct or indirect award. This entry also results in restricted ending cash and investments.

Loans are created:

518.63.40 Financial Assistance and Other Distributions	$5,000
Cash		$5,000

The full amount of the grant revenue continues to be reported as restricted cash and investments.

Receive payments on loans:           

Cash	$1,000
337.00.00 Local Grants and Other Payments		$900
361.40.00 Other Interest		$100

The receipt of this interest revenue increases the restricted ending cash and investments because in most cases, the federal awarding agency requires you to use the interest income for a specific purpose (such as continuing to support the revolving loan program).

Other expenditures:

5XX.XX.X0 Expenditure/Expense	$2,000
Cash		$2,000

If the award agency approves for the funds to be used on a project or spent for something besides making loans, the local government would record an expenditure. There is no specific BARS code for the expense as it depends on the specific function of government that the activity is related to.

3.4.7.5 Working Advances from the Department of Social and Health Services (DSHS) 

This guidance applies only to counties and Area Agencies on Aging (AAA). 

The DSHS provides working advances to local governments in conjunction with aging, mental health, developmental disabilities and alcohol and drug rehabilitation programs.  Working advances are provided in order to alleviate the cash flow problems associated with the time lag between the governments' expenditures and reimbursements from the DSHS. 

Working advances should be treated as debt and reported on the Schedule of Liabilities (Schedule 09). 

The receipt of a working advance should be recorded as follows: 

Cash	$50,000
391.80.00 Intergovernmental Loans		$50,000

3 Accounting

3.4 Liabilities

3.4.5 Issuance of Duplicate Instruments [1]

3.4.5.10 Before a duplicate instrument is issued, the issuing officer should require the person making application for its issue to file in his/her office a written affidavit specifically alleging on oath that he/she is the proper owner, payee, or legal representative of such owner or payee of the original instrument, giving the date of issue, the number, amount, and for what services or claim or purpose the original instrument or series of instruments of which it is a part was issued, and that the same has been lost or destroyed, and has not been paid or received by him/her.

3.4.5.20 The following is a sample for use by all political subdivisions.

---

Footnotes

[1] Lost or destroyed evidence of indebtedness issued by local governments: RCWs 39.72.010, 39.72.020 

Lost or destroyed evidence of indebtedness issued by state or state agencies: RCWs 43.08.064, 43.08.066, 43.08.068

[2] City/county/district may require the affidavit to be signed by a notary public.

3 Accounting

3.4 Liabilities

3.4.1 Leases and Installment Purchases

3.4.1.10 Lease definition

A contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like
transaction.

3.4.1.20 Exclusions

The following items are not considered leases. For lessees that means these would not be reported on the Schedule of Liabilities (Schedule 09) as lease liabilities.

• Short-term leases – One that, at the beginning of the lease, has a maximum possible term of 12 months or less, including any options to extend - e.g. rolling month-to-month leases
• Interfund leases – Leases between departments or funds within the same government
• Lease of intangible assets – This includes mineral rights, patents, software, copyrights, except for the sublease of an intangible right-to-use asset created by the original lease of a tangible underlying asset
• Leases of biological assets – such as timber, living plants, and living animals
• Leases of inventory
• Service concession arrangements
• Assets financed with outstanding conduit debt – unless both the asset and conduit debt are reported by the lessor
• Supply contracts – such as power purchase agreements that do not convey control of the right to use the underlying power generating facility
• Certain regulated leases – such as aviation leases between airports and air carriers

3.4.1.30 Summary of BARS codes

34P.PP	Lessors – For lease payments received if leasing is the primary operation of the fund.
362.00	Lessors – For lease payments received that are not the primary operation of the fund.
591.PP.70	Lessee – Lease/rental payments (ownership of asset is not transferred at the end of the contract)
594.PP.70	Installment purchase payments – Ownership of asset is transferred at the end of the contract

3.4.1.40 Lessor accounting

Lessors only need to report the cash payments received for lease payments on the Schedule 01. Since lessors are receiving payments, there is no liability to report on the Schedule 09. To receipt payments, use either BARS Code 34P.PP or 362.00. If leasing is the primary operation/function of the fund that the payment is being receipted into, then use BARS Code 34P.PP which is a Charge for Services code. The “P” stands for prescribed numbers that are related to the function of the leasing activity. Review the chart of accounts to identify the applicable function and determine the full BARS Code. An example of when to use the 34P.PP code would be a port whose primary operation is leasing buildings.

If leasing is not the primary operation/function of the fund that the payment is being receipted into, then use BARS Code 362.00. An example of when to use BARS Code 362.00 is when a city or county is receipting lease payments into the general fund.

Lessors will use the revenue codes above for both short-term and long-term leases.

3.4.1.50 Lessee accounting and reporting

At the start of the lease, lessees will not report any inflows or outflows on the Schedule 01. Lessees will record actual lease payments made to the lessor on the Schedule 01 using BARS Code 591.PP.70.

Short term lease payments should be coded to normal, functional BARS expenditure codes. For example, if a government has a short-term lease for a copier that is used by the water utility fund, the lease expense would be coded to BARS 534.00.40.

Lessees are also required to include a note disclosure about their lease activity in the Notes to the Financial Statements. See template note at Note X – Leases (Lessees).

3.4.1.51 Variable and other non-lease payments

Variable payments should be excluded from the lease liability calculation. Variable payments are those that depend on future performance of the lessee or usage of the underlying asset. For example, a car lease may also include a charge per mile. The payment amount would vary depending on how many miles were driven, so the per mile charge would be excluded from the lease liability. Another type of variable payment would be charging a percentage of the lessee’s revenues.

However, if the variable payment is fixed in substance, it should be included in the calculations. For example, if a lessee is required to remit the greater of 10% of their sales or $5,000 each month, then the $5,000 payment is fixed in substance because the lessee will always be required to pay at least $5,000.

Some contracts include additional fees or taxes. Only the portion of the payment that is related to the right to use the asset should be included in the lease liability calculation. For example, if a copier lease also includes maintenance and sales tax, those are non-lease payments and should be excluded from the lease liability.

BARS Code 591 should only be used for the lease payments that are related to the right to use the asset. The variable and non-lease payments should be coded to regular, functional BARS expense codes.

3.4.1.52 Lease rate increases

Some contracts include clauses to increase the rates over time. There are two types of rate increases, known rate increases and variable rate increases. An example of a variable rate increase is an increase based on the Consumer Price Index (CPI) where the amount of the increase will vary depending on the CPI. An example of a known rate increase is a flat 3% annual increase where the increase amount is known and can be calculated for each period.

If the contract includes a variable rate increase, that rate increase should be ignored for purposes of calculating the liability on the Schedule of Liabilities, since the increase amount is unknown at the time of calculation.

For example, there is a 5-year lease that charges $500 per month for the first year and in each subsequent year the rent will be increased based on the CPI. The lease liability would be $30,000, which is $500 multiplied by 60 months (5 years). Since we do not know what the CPI increase will be in the future, the CPI increase is not factored into our calculation.

When making the monthly payment, only the original $500 used to calculate the liability should be coded to BARS 591.XX.70. For example, if the lease payment increased to $550 in the second year, the payment would be split into two different BARS codes: $500 would be charged to BARS 591.XX.70 and the remaining $50 would be charged to a functional BARS expense code.

Conversely, if a lease payment increases based on a flat rate, that should be factored into the liability. For example, there is a 5-year lease that charges $500 per month for the first year and each subsequent year the rent will be increased by 3%. The lease liability is $31,855 as shown below:

Monthly rate (increased by 3% each year)	Months	Annual lease payments
$500	12	$6,000
$515	12	$6,180
$530	12	$6,365
$546	12	$6,556
$563	12	$6,753
Total beginning lease liability		$31,855

This increase is factored into the total liability because it is known and can be accurately calculated at the beginning of the lease.

3.4.21.43 Prepaid Leases

Some contracts require payment for all years of the contract upfront. When the entire term of the contract is paid at the beginning, this is a prepaid lease. For example, a government enters a lease contract for 5 years at a price of $10,000 per year. The government pays $50,000 for all 5 years at the beginning of the contract, so this is a prepaid lease. Prepaid leases are not reported on the Schedule of Liabilities since the government does not owe the lessor any additional payments.

3.4.1.55 Lessee Schedule 09 reporting

Lessees will report a lease liability on the Schedule 09 measured at the total amount of future lease payments. See Schedule 09 reporting instructions.

In the year of implementation, any existing leases should report a beginning balance on the Schedule 09. The beginning balance reported should be the total amount of lease payments that were remaining as of the beginning of the year. In subsequent years, the beginning balance should match the prior year ending balance.

Any leases that are entered into during the year will be reported as an addition on the Schedule 09. The addition will be the total amount of future lease payments.

Reductions are the amount the lease liability is reduced during the year, which is typically the amount of lease payments made.

If the lease liability is remeasured for any of the items listed in Section 3.4.1.70, the change in the lease liability should be reported as either an addition or reduction on the Schedule 09.

3.4.1.60 Lease term

To calculate the total amount of future lease payments for the schedule 09, you need to know how many payments you are expecting to make which depends on the lease term. Here is what should be included in the lease term:

• The period during which a lessee has a non-cancelable right to use an underlying asset
  • plus periods covered by a lessee’s or lessor’s option (contractual right) to extend the lease (if reasonably certain the option will be exercised)
  • and periods covered by the lessee’s or lessor’s option (contractual right) to terminate the lease (if reasonably certain the option will not be exercised)
• Lease term excludes periods for which both the lessee and lessor each have the option to terminate or both parties must agree to extend

In situations where contracts automatically renew, not canceling is the same as choosing to extend the contract.  As above, future renewals are not part of the lease term if both parties have the right to not renew (i.e. cannot be forced into continuing the contract).

Determining whether a lease option is reasonably certain of being exercised or not requires professional judgement and should take into consideration the specific facts and circumstances at your government. Examples of items to consider in this analysis:

• Is there a history of extending the lease?
• Is the item being leased essential to your government’s operations or services provided to citizens?
• Can the asset be leased from other sources?
• Any other factors relevant to your specific circumstances.

3.4.1.70 Remeasuring the lease liability

The lease liability reported on the Schedule 09 must be remeasured (recalculated) if any of the following happen:

• Change in lease term
  The lease term might change if you were previously not going to exercise an extension option, but then determine you will extend the lease (or vice versa). In that case you should recalculate the lease liability to include the additional payments related to extending the lease term.
• Change in likelihood of purchase option
  If you previously determined you were not going to purchase the asset, but later determine that you will purchase the asset, then you should start treating the contract like an installment sale (use BARS codes 594.PP.70 for payments and the installment purchase codes on the schedule 09). Sometimes purchase options require additional amounts to be paid at the end of the contract in order to purchase the asset, those additional amounts should be added to your installment purchase liability on the schedule 09.
• Contingency resolved for variable payments.
  If your lease payments were variable and later on all of your remaining lease payments become known (no longer variable), then you should recalculate the lease liability using the fixed known amounts.

3.4.1.80 Installment purchases (formerly called capital leases)

Leases that transferred ownership of the asset to the lessee were previously called capital leases. These are now called installment purchases. If a lease has a purchase option or bargain purchase option, you will need to determine whether that option will be exercised or not. If you determine the purchase option will not be exercised, treat the contract like a lease. If you determine that the purchase option will be exercised, treat the contract like a financed purchase.

3.4.1.85 Installment purchase accounting

You will add a liability to the Schedule 09 (Schedule of Liabilities) for the total amount of future payments, including the cost of any purchase options. At the start of the contract you do not record any inflows or outflows on your Schedule 01. You will record payments made on your Schedule 01 using BARS Code 594.PP.70. Some installment purchase contracts will include an interest charge. In that case, interest expenditure should be coded to BARS 592.XX.80.

If your government previously determined they would not exercise the purchase option, but then later do exercise it, you should start treating the contract as an installment purchase at the time the decision is made. That means you should start coding your remaining lease payments to BARS 594.PP.70. However, you should not go back and change the BARS codes of any of your previous payments.

3 Accounting

3.4 Liabilities

3.4.11 LOCAL Program Financing

3.4.11.10 Local governments have an efficient financing option provided by the State Treasurer – the LOCAL program – that allows them to pool funding needs into large offerings of securities issued by the State Treasurer in order to take advantage of favorable market conditions.

3.4.11.20 Washington governments may use the LOCAL program to purchase equipment or real estate – everything from radios and computer systems to fire or police cars to building improvements or other construction.

3.4.11.30 Accounting

The State Treasurer issues debt on behalf of the local government. The State Treasurer holds LOCAL program proceeds and makes direct payments to vendors to and from the government’s specially designated LGIP account. Although proceeds are received and payments made by the State Treasurer, the government must account for and report both the debt issuance and capital asset purchase made on its behalf.

3.4.11.40 The debt issuance transaction must be reported as soon as the debt is issued and the resources placed in the Local Governments Investment Pool (LGIP), or other bank account. The date reimbursement requests are submitted to the State Treasurer is not the date the liability has been incurred.

Debt proceeds should be reported in the fund that will be using the proceeds. As with other debt, a local government may use a debt service fund to account for the debt payments.

3.4.11.50 Journal entries

Journal entry for debt issuance:   
            Cash                                                                                                                          $XXX 
            596.XX.70 Issuance Discount on Long-Term Debt (if applicable)                             $XX
            592.XX.80 Interest and Other Debt Service Costs (for issuance costs)                    $XX                                                                                                                                                                                                                       
                        391.90.00 Other Debt Proceeds                                                                                      $XXX                      
                        392.00.00 Premiums on Bonds Issued (if applicable)                                                     $XX                       

Journal entry for capital asset purchase:                
            594.XX.60 Capital Expenditures                           $XXX
                        Cash                                                                            $XXX

Journal entry for debt repayment:
            591.XX.70 Debt Repayment (principal)                $XX
            592.XX.80 Interest and Other Service Costs        $XX
                        Cash                                                                             $XX

3.4.11.80 Reporting

LOCAL program proceeds must be reported as long-term debt and included in the Schedule 09, Schedule of Liabilities using Debt ID 263.96 LOCAL program financing. Only the face value of the debt should be reported on the Schedule 09. Do not include any premiums or discounts on the Schedule 09.

Debt incurred under this program may be considered either voted or non-voted and it should be included in the calculation of the local government’s debt limitation (see 3.10.5 Compliance – Limitation of Indebtedness).