GAAP Basis - Interfund Activities Accounting

This training is a beginner's guide to interfund activities for GAAP basis governments. Interfund activities involve transactions between separate funds within a single government, requiring at least two journal entries per transaction.

Interfund activity is financial activity between a government's reported funds, like a general fund and a utility fund. Managerial funds are sub-funds used for internal tracking, which are rolled up into larger funds for financial reporting. Activity between managerial funds is 'intrafund activity' and is eliminated for financial statements, unlike the 'interfund activity' discussed in this video.

Interfund activities are categorized as either reciprocal or nonreciprocal. Reciprocal activities involve an equal or near-equal exchange of value (interfund loans, interfund services provided/used). Nonreciprocal activities do not involve an equal exchange (interfund transfers, interfund reimbursements).

Interfund loans occur when one fund borrows from another, with repayment and interest. Loan documents should specify terms. Loans are generally short-term (3 years or less). Interest must be charged to prevent one fund from benefiting another. The borrowing fund records a liability (interfund loans payable) and the lending fund records a receivable (interfund loans receivable).

Upon repayment, the borrowing fund debits interfund loan payable and interest expense, crediting cash. The lending fund debits cash, crediting interfund loan receivable and interest revenue. If a loan is unlikely to be repaid within a reasonable timeframe, it should be reclassified as a transfer.

If repayment of an interfund loan is not expected, the loan should be reclassified as a transfer. The borrowing fund debits interfund loan payable and credits a transfer-in. The lending fund credits interfund loan receivable and debits a transfer-out.

One fund sells goods or services to another fund as part of its normal activity. Transactions are accounted for as normal revenues for the service provider and normal expenses for the service recipient (e.g., park fund renting facilities to water department, utility fund providing services to other city departments, internal service funds). This is treated like an arm's-length transaction.

The fund providing the service records a charge for service type revenue (credit) and debits cash or 'due from other funds' (for short-term receivables). The fund receiving the service records an expense/expenditure (debit) and credits cash or 'due to other funds' (for short-term payables). These 'due to/from' accounts are used to differentiate interfund receivables/payables from external ones.

Transfers are movements of cash between funds with no repayment requirement. They are nonreciprocal as there's no equal exchange. Transfers in must always equal transfers out. Caution is advised with restricted revenues transferred between funds, as the restrictions follow the funds. Transfers out of utility funds are rare and scrutinized.

The fund providing resources debits 'transfer out' (BARS code 597.00.00) and credits cash. The fund receiving money debits cash and credits 'transfer in' (BARS code 397.00.00).

Reimbursements occur when one fund (original fund) pays a bill belonging to another fund (responsible fund), and the responsible fund repays the original fund. The responsible fund records the expenditure, and the original fund reduces its previously recorded expense. Reasons include correcting errors or administrative cost allocation (e.g., general fund processing payroll for other funds).

If an error: Original fund (e.g., general fund) debits expenditure, credits cash. When reimbursed, it debits cash and credits the original expenditure. Responsible fund (e.g., sewer fund) debits expense, credits cash. If administrative ease: Original fund records its portion as expenditure and the responsible fund's portion as 'due from other funds' (debit), crediting cash for the total. The responsible fund records its expense and a 'due to other funds' (credit). When reimbursed, the original fund debits cash, credits 'due from other funds,' and the responsible fund debits 'due to other funds,' credits cash.

Utility taxes are a tax revenue for the general fund (BARS code 316.40.00) and an expense for the utility fund (functional expense BARS code). They should not be reported as transfers. Governments should review transfers out of proprietary funds, as these are often misclassified expenses.

Both result in an expense for the responsible fund, but the original fund's accounting differs. Reimbursements reduce the original fund's expense, while services result in revenue for the providing fund. Internal service funds typically record revenue because providing services is their programmatic activity. General funds performing cost allocation (e.g., payroll processing) usually perform reimbursements, reducing their expenses, as they are not in the business of selling those services.

Further information can be found in the BARS Manual (Section 3.9.8 for Interfund Activities Overview) and the GASB Codification (Section 1800 – Classification and Terminology). Viewers are encouraged to submit Help Desk inquiries for specific questions.