[nalratoss]

Even after reading the answer, I still don’t understand:

The city of Hull has established a separate internal service (self-insurance) fund to pay claims and judgments of all of Hull’s funds. In the current year, payments to the internal service fund amounted to $500,000, but the actuarially determined amount was $400,000. The payments to the internal service fund should be accounted for by that fund as

A Transfer of | Interfund Revenues of
$500,000 | $0
$0 | $0
$400,000 | $100,000
$100,000 | $400,000
This answer is correct.
A governmental entity may use a single fund to account for its risk financing activities. The choice of fund depends on the nature of the activity to be reported. Thus, an entity may use a governmental fund or an internal service fund to account for risk-financing activities. But participation in such an internal service fund is not limited to governmental funds. For example, proprietary funds and trust funds of the same primary government may participate. An internal service fund may be used only if the reporting government is the predominant participant in the activity. The fund may use any basis it deems to be appropriate for charging other funds, subject to certain conditions: (1) The total periodic charge is calculated in accordance with procedures similar to those used to report contingent liabilities under GAAP for nongovernmental business enterprises, or (2) the total charge is based on an actuarial method or historical costs adjusted over a reasonable time so that internal service fund revenues and expenses are approximately equal. The second calculation also may include a reasonable provision for expected future catastrophic losses. Charges determined under (1) or (2) are revenues of the internal service fund and expenditures or expenses of the other funds. If the charge to the other funds exceeds the amount determined under (1) or (2), the excess should be reported in the internal service fund and the other funds as an interfund transfer.

The answer is last one by the way. To be more precise, what’s the difference between “transfer” and “interfund revenue”?

FAR-80

AUD-77

REG-75

BEC-82

 

I'm done done!

[Anonymous]

A transfer is moving cash from one fund to another, so its cash in, but not revenue.
Revenue is cash in that is earned.

There's no way they would actually ask a question this complicated on the actual exam, right? Its crazy!

But anyway, the government had so much money that they decided, hey! Instead of paying Nationwide monthly premiums to insure our cop cars, lets insure it ourselves. We will put a bunch of money into an internal service fund and just leave it there until we crash a car. Then we will use the money in the fund to replace the car. So they transferred $500k to the internal service fund.

Since that fund is now acting like an insurance company, it can charge other funds a fee just like Nationwide charges a premium. But the charge has to be a fair amount. The “fair amount” is dictated by the really wordy rules in the MCQ explanation above. So an actuary valued the “policy” based on risk tables and decided that the coverage was worth charging $400k. The internal service fund is allowed to recognize $400k as revenue and the rest of the cash-in is just a transfer.

I guess the take away is that interfund cash-in does not equal revenue. There's a section in the Becker book on Reciprocal and Nonreciprocal Interfund Activity that does a crap job of vaguely hinting at it. Probably because its not likely to be on the actual exam.

[Author]

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