FAR, Financial Accounting and Reporting

Sources for State and Local Government Accounting

Last reviewed 2026-10-18

The standards and authorities behind PocketCPA's FAR lessons on State and Local Government Accounting. The topic rests on GASB Statements No. 9, 33, 34, 54, 61, 63, 65, 68, 75, 84, 87 and 96, and GASB Codification Sections 1300, 1600, 1700, 2200 and 2400.

About this topic

State and local governments do not exist to earn a profit. They raise resources through taxes and spend them on public services. Legal restrictions decide where each dollar may go.

To answer both, the Governmental Accounting Standards Board (GASB) requires two overlapping views of the same government, prepared on two different bases of accounting. FAR tests this dual-perspective model heavily, and the traps almost always live in the seams between the two views.

Key points

• Governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting.
• Government-wide statements use the economic resources measurement focus and the full accrual basis.
• The three fund categories are governmental (5 types), proprietary (2 types), and fiduciary (4 types).
• A reconciliation bridges the fund-level and government-wide statements, explaining differences in measurement focus and basis.
• The General Fund is always a major fund; other funds must pass the 10%/5% dual test to be individually reported.

What the lessons cover

1. Measurement focus and basis of accounting
2. The three fund categories and their fund types
3. Modified accrual: revenue and expenditure recognition
4. Fund balance classifications under GASB 54
5. The GASB 34 reporting model
6. GASB 34: special and extraordinary items, and eliminations
7. GASB 34: net position under GASB 63
8. GASB 34: capital assets and the modified approach for infrastructure
9. Reconciling fund statements to government-wide statements
10. MD&A and required supplementary information
11. Major funds and the two-part test
12. Nonexchange transactions under GASB 33
13. Budgetary accounting and encumbrances
14. Proprietary funds and the statement of cash flows
15. Pensions and OPEB under GASB 68 and GASB 75
16. Leases and SBITAs under GASB 87 and GASB 96
17. The financial reporting entity and component units under GASB 61

Authoritative references

Where these requirements sit in the literature.

• GASB Statement No. 34, paragraph 6 fixes the minimum reporting package and the basis each view uses.
  • The package is MD&A, the basic financial statements, and RSI other than MD&A.
  • The government-wide statements display the reporting government as a whole except for its fiduciary activities, on the economic resources measurement focus and the accrual basis.
  • Each fund category uses the measurement focus and basis of accounting required for that category.
  • Paragraphs 12 and 13 name the two government-wide statements, the Statement of Net Position and the Statement of Activities.
• GASB Statement No. 34, paragraph 76 is the major fund test.
  • The main operating fund is always major.
  • Any other governmental or enterprise fund is major when a single element clears both tests below. The elements are assets, liabilities, revenues, and expenditures/expenses.
  • The 10 percent test. That element is at least 10 percent of the corresponding total for all funds of that category.
  • The 5 percent test. The same element is at least 5 percent of the corresponding total for all governmental and enterprise funds combined.
  • The footnotes to paragraph 76 exclude internal service funds from major fund reporting entirely, and exclude amounts reported as extraordinary items from the computation.
  • GASB Statement No. 65, paragraph 33 amends the arithmetic to combine assets with deferred outflows and liabilities with deferred inflows.
• GASB Statement No. 34, paragraphs 47 through 53 sort revenues in the Statement of Activities.
  • Paragraph 47 maps four financing sources to fixed answers.
  • Paragraph 48 requires three separate program revenue categories: charges for services, operating grants and contributions, and capital grants and contributions.
  • Paragraph 52 makes all revenues general revenues unless required to be program revenues, and all taxes general revenues even when levied for a specific purpose.
  • Paragraph 53 places contributions to permanent fund principal, special and extraordinary items, and transfers below general revenues.
• GASB Statement No. 34, paragraphs 55 and 56 separate extraordinary items from special items.
  • Extraordinary items are both unusual in nature and infrequent in occurrence, and are reported at the bottom of the statement of activities.
  • Special items are significant events within management's control that are either unusual or infrequent, and are reported before extraordinary items.
  • Events that are unusual or infrequent but outside management's control are disclosed in the notes.
• GASB Statement No. 34, paragraphs 23 through 26 carry the modified approach for eligible infrastructure assets.
  • The asset management system needs an up-to-date inventory, condition assessments summarized on a measurement scale, and an annual estimate of the amount needed to preserve the assets.
  • The documentation must show that complete condition assessments are performed at least every three years, and that the three most recent give reasonable assurance the assets are preserved at or above the disclosed condition level.
  • Paragraph 25 expenses all expenditures except additions and improvements, which increase capacity or efficiency.
  • Paragraph 26 restores depreciation prospectively if the requirements lapse.
• GASB Statement No. 34, paragraphs 18 through 22 carry capital assets.
  • Measurement is at historical cost including ancillary charges.
  • Infrastructure assets are normally stationary long-lived assets preservable for significantly more years than most capital assets, excluding buildings that are not an ancillary part of a network.
  • Assets not being depreciated are reported separately where significant.
  • Inexhaustible assets such as land are exempt from depreciation.
• GASB Statement No. 34, paragraphs 41 through 44 set the expense side of the statement of activities.
  • Direct expenses are reported by function at a minimum.
  • Indirect expense allocation is optional, but requires separate columns where it is done.
  • Depreciation is allocated to functions by how specifically the asset serves them. Assets serving all functions may sit on an unallocated line or within general government.
• GASB Statement No. 34, paragraph 67 lists the three criteria, any one of which makes an enterprise fund required rather than merely permitted.
  • Debt secured solely by a pledge of the activity's own net revenues.
  • A legal or regulatory requirement that costs including capital costs be recovered with fees.
  • Pricing policies designed to recover those costs.
  • Each criterion is applied in the context of the activity's principal revenue sources.
  • Paragraph 68 permits an internal service fund only where the reporting government is the predominant participant.
• GASB Statement No. 34, paragraphs 57 through 61 and 112 govern eliminations and interfund activity.
  • Interfund receivables and payables are eliminated within each activities column, with the net residual shown as internal balances, and everything is eliminated in the total primary government column.
  • Amounts due to and from fiduciary funds are treated as external.
  • Internal service fund doubling-up and internal overhead allocations are eliminated from the statement of activities.
  • Interfund services provided and used are not eliminated, because eliminating them would misstate both the buyer's expenses and the seller's program revenues.
  • Paragraph 112 classifies interfund activity as reciprocal (interfund loans, interfund services provided and used) or nonreciprocal (interfund transfers, and interfund reimbursements, which are not displayed at all).
• GASB Statement No. 34, paragraphs 77, 85 and 90 require the reconciliations and list their typical items. Those items include, in both reconciliations, the internal service fund amounts folded into governmental activities under paragraph 62.
• GASB Statement No. 34, paragraphs 130 and 131 require the budgetary comparison schedule as RSI.
  • Which funds it covers. The general fund, and each major special revenue fund with a legally adopted annual budget.
  • What it presents. The original budget, the final budget, and actual amounts on the budgetary basis, with a reconciliation of budgetary information to GAAP information.
  • Paragraph 130a defines the original budget to include appropriations automatically carried over from prior years by law.
• GASB Statement No. 54, paragraphs 5 through 19 define the five fund balance classifications as a hierarchy based on how tightly the government is bound to honor constraints.
  • Paragraph 6, nonspendable, including long-term receivables and property held for resale, and the proviso that constrained proceeds go elsewhere.
  • Paragraphs 8 and 9, restricted, including enabling legislation that is legally enforceable by external parties.
  • Paragraphs 10 through 12, committed by formal action of the highest level of decision-making authority before period end, with the amount determinable afterward.
  • Paragraphs 13 through 16, assigned, including the default assignment of residual amounts in non-general funds, and the bar on creating a deficit in unassigned.
  • Paragraph 17, unassigned as the general fund residual and the only positive unassigned balance.
  • Paragraph 19, the negative residual, which reduces other assigned amounts first, then becomes negative unassigned, and is never reported as negative restricted, committed, or assigned in any fund.
• GASB Statement No. 54, paragraphs 20 through 24 and 28 through 35 carry the stabilization, encumbrance and fund type rules.
  • Stabilization arrangements are reported in the general fund as restricted or committed by the source of the constraint, and otherwise as unassigned.
  • Encumbrances get no separate reserve. They are folded into committed or assigned where not previously constrained, and are disclosed in the notes.
  • A special revenue fund must rest on restricted or committed revenue sources that remain a substantial portion of inflows.
  • Permanent funds benefit the government or its citizenry, while private-purpose trusts benefit individuals, private organizations, or other governments.
• GASB Statement No. 63, paragraphs 7 through 11 place the deferred elements and define net position.
  • Placement. Deferred outflows sit in a separate section after assets, and deferred inflows in a separate section after liabilities.
  • The residual is labeled net position, and has three components.
  • Paragraph 9 reduces net investment in capital assets by debt attributable to those assets, but excludes the portion attributable to significant unspent proceeds, which follows the unspent amount into restricted or unrestricted instead.
  • Paragraph 11 makes unrestricted the residual, which may be negative.
• GASB Statement No. 65 carries two rules on the word deferred.
  • Paragraph 30 requires a deferred inflow of resources when an asset is recorded in a governmental fund but the revenue is not available.
  • Paragraph 31 limits the word deferred to deferred outflows and deferred inflows of resources.
• GASB Statement No. 84, paragraphs 14 through 19 define the four fiduciary fund types.
  • The four types are pension (and other employee benefit) trust, investment trust, private-purpose trust, and custodial.
  • The common test. Each turns on whether the assets sit in a trust in which the government is not a beneficiary, dedicated to benefits, and legally protected from the government's creditors.
  • Paragraph 18 defines custodial funds by subtraction, and puts external investment pool portions not held in such a trust into a separate column under custodial funds.
  • Paragraph 19 lets a business-type activity report custodial-type assets and liabilities on its own statement of net position when they are normally expected to be held three months or less.
• GASB Statement No. 87 applies a single lease model.
  • Paragraph 4 defines a lease as conveying control of the right to use another entity's nonfinancial asset.
  • Paragraph 12 builds the lease term from the noncancelable period plus options reasonably certain of exercise.
  • Paragraph 16 defines a short-term lease on the maximum possible term of 12 months or less including all extension options regardless of probability.
  • Paragraph 19 treats a transfer-of-ownership contract as a financed purchase or sale.
  • Paragraphs 20, 21, 30 and 31 give lessee recognition, measurement and amortization.
  • Paragraphs 35 and 36 give the governmental fund expenditure and other financing source.
  • Paragraphs 40, 44, 53 and 54 give lessor recognition of a lease receivable and a deferred inflow of resources.
  • Paragraph 55 provides that a lessor does not derecognize the underlying asset.
• GASB Statement No. 96 applies that framework to SBITAs.
  • Paragraph 6 defines a SBITA.
  • Paragraph 8 excludes contracts that solely provide IT support services, while including combined contracts.
  • Paragraph 4 excludes perpetual licenses, and arrangements where the software component is insignificant relative to the tangible capital asset.
  • Paragraph 13 defines a short-term SBITA on the same 12-month maximum-possible-term basis.
  • Paragraph 15 puts commencement at completion of the initial implementation stage.
  • Paragraph 29 groups outlays into the preliminary project, initial implementation, and operation and additional implementation stages, which paragraphs 34, 35 and 37 expense, capitalize and expense respectively.
  • Paragraph 31 places data conversion by whether it was necessary to place the asset in service.
• GASB Statement No. 68, paragraph 20 measures the net pension liability.
  • The measurement is the total pension liability, meaning the actuarial present value of projected benefit payments attributed to past service, less the pension plan's fiduciary net position, at a measurement date no earlier than the end of the employer's prior fiscal year.
  • Paragraph 21 forbids netting aggregated pension liabilities against aggregated pension assets.
  • Paragraph 22 permits a roll-forward from a valuation no more than 30 months and 1 day before the employer's fiscal year end.
  • Paragraph 46 places the pension schedules in RSI.
  • In governmental funds, a net pension liability is recognized only to the extent normally expected to be liquidated with expendable available financial resources, and pension expenditures equal amounts paid plus the change in that amount.
  • GASB Statement No. 75, paragraph 21 parallels all of this for OPEB.
• GASB Statement No. 61, paragraph 8 amends Statement 14 paragraph 53 to require blending in any of three circumstances.
  • A substantively-the-same governing body, plus a financial benefit or burden relationship or operational responsibility.
  • Services provided or benefits conferred entirely or almost entirely on the primary government.
  • Total debt outstanding, including leases, expected to be repaid entirely or almost entirely with the primary government's resources.
  • Paragraph 9 amends Statement 14 paragraph 54 to make the primary government's general fund the only general fund of the reporting entity, so a blended component unit's general fund is reported as a special revenue fund.
• GASB Statement No. 33 classifies nonexchange revenues into four classes.
  • Derived tax revenues are recognized when the underlying exchange occurs.
  • Imposed nonexchange revenues give an asset when an enforceable legal claim arises or resources are received, whichever is first. Revenue comes in the period the resources are required or first permitted to be used, which for property taxes is the period for which they are levied and for fines is when they are imposed.
  • Government-mandated and voluntary nonexchange transactions are recognized only when all eligibility requirements are met, with resources received earlier reported as a liability or deferred inflow.
• GASB Statement No. 9, as amended by GASB 34 paragraph 105, requires proprietary fund cash flow statements on the direct method, with a reconciliation of operating cash flows to operating income.
  • Four categories. Operating, noncapital financing, capital and related financing, and investing.
  • Interest and dividends received are investing.
  • Interest paid on capital-related debt is capital and related financing.
  • Interfund transfers and subsidies not restricted to capital purposes are noncapital financing.
  • All three of those classifications differ from the FASB classification.
• GASB Codification Section 1600 carries the modified accrual rules.
  • Revenue is recognized when measurable and available.
  • Debt service is an expenditure when due (matured).
  • Inventories and prepaids take either the purchases method or the consumption method.
  • Compensated absences, claims and judgments are expenditures only to the extent they will be liquidated with current financial resources (Sections C50 and C60).
  • Section P70 carries the 60-day ceiling on the property tax availability window.
  • Section 1300 carries the fund structure.
  • Section 1700 carries the budgetary and encumbrance accounting.
  • Section 2200 carries the three sections of the ACFR.
  • Section 2400 requires the actual column to use the same budgetary basis as the legally adopted budget, with a reconciliation to GAAP where they differ.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.

See also

• Sources for every FAR topic
• Free FAR sample questions
• The CPA exam glossary