Reconciling governmental fund statements to the government-wide statements

• Identify the standard reconciling items between governmental funds and governmental activities
• Prepare a fund balance to net position reconciliation
• Explain how internal service funds and capital outlay affect the reconciliation
• Design audit procedures that tie each reconciling item to supporting schedules

Why a reconciliation is required

Governmental funds and governmental activities report the same government through two lenses. Statement 34 paragraph 77 requires a summary reconciliation to the government-wide statements at the bottom of the fund statements or in an accompanying schedule. Brief explanations on the face are often enough, but when an aggregated line hides the nature of the items in it, the government must give a more detailed explanation in the notes. Two reconciliations are required: balance sheet to statement of net position, and the operating statement to the statement of activities.

Balance sheet: fund balance to net position

Start with total governmental fund balances and adjust:

• Capital assets, net: added. They are not current financial resources, so the funds do not report them.
• Unavailable revenue: added back. Revenue deferred in the funds for availability is earned in the government-wide statements.
• Deferred outflows related to pensions and OPEB: added.
• Internal service fund net position: added for the portion that serves governmental activities.
• Long-term liabilities not due and payable in the period: subtracted. These include bonds and notes, leases and subscription liabilities, compensated absences, net pension and OPEB liabilities, and claims.
• Accrued interest payable: subtracted, because the funds record interest only when due.
• Deferred inflows related to pensions and OPEB: subtracted.

Operating statement: net change in fund balances to change in net position

Start with the net change in fund balances and adjust:

• Capital outlay less depreciation: funds expend the full cost; the government-wide statements capitalize it and record depreciation. Add capital outlay, subtract depreciation and amortization.
• Disposals: the funds report only sale proceeds. The government-wide statements report the gain or loss, so the net book value of assets sold is subtracted.
• Debt: bond proceeds are an other financing source in the funds but a liability in the government-wide statements, so they are subtracted. Principal repayments are expenditures in the funds but reduce a liability, so they are added back. Premiums, discounts and changes in accrued interest also adjust.
• Revenue timing: the change in unavailable revenue.
• Long-term expenses: the change in compensated absences, pension and OPEB expense versus contributions, and claims.
• Internal service funds: the net revenue (expense) of internal service funds allocated to governmental activities.

Audit approach

Treat the reconciliation as a set of assertions, not a plug.

1. Agree the starting points to the fund statements and the end points to the government-wide statements.
2. Tie capital assets, capital outlay and depreciation to the capital asset rollforward in the notes. Capital outlay in the funds rarely equals additions, because some additions are donated, financed through leases or recorded in enterprise funds; reconcile the difference.
3. Tie each long-term liability line to the long-term debt rollforward note, and the pension and OPEB lines to the actuarial reports.
4. Agree unavailable revenue on both reconciliations: the balance sheet line equals the current deferred inflow, and the operating statement line equals the current balance less the prior-year balance.
5. Recompute internal service fund allocations, especially where some charges go to enterprise funds.
6. Read the note detail for any aggregated line. If the face of the statement shows a single line for "long-term liabilities not due and payable," the notes must break it down when the total hides items of different nature, as paragraph 77 requires.

Where errors come from

Most governments keep their books on the modified accrual basis all year and post a set of conversion entries at year end to produce the government-wide statements. The reconciliation is effectively a summary of those entries. Errors arise when a conversion entry from the prior year is not reversed, when the capital asset system and the ledger disagree, or when a new liability (a lease, a subscription, a pollution remediation obligation) is booked in the ledger but never added to the conversion workbook.

An unexplained residual is a finding in its own right. A reconciliation that includes a line called "other" or "adjustment" points to an error in the government-wide conversion entries. The fund accounting guide shows the fund entries that feed these lines; lesson 7 on capital assets covers the rollforward.

From fund balance to net position at Lakeview City