A proprietary fund is the fund type a government uses to account for its own ongoing activities that resemble those found in the private sector, where the intent is to recover the cost of the activity through charges to whoever uses it. It is one of the three fund categories in state and local government accounting, and it is the one whose accounting looks most like a business’s. Two fund types sit inside it, enterprise funds and internal service funds.
What the Category Is For
The scope is drawn by the nature of the activity rather than by who runs it. All assets, deferred outflows of resources, liabilities, deferred inflows of resources, net position, revenues, expenses and transfers relating to a government’s business and quasi-business activities, in which changes in net position or cost recovery are measured, are accounted for through proprietary funds, and the generally accepted accounting principles for those funds are similar to those applicable to private-sector businesses (National Center for Education Statistics, Financial Accounting for Local and State School Systems, Chapter 4).
The purpose test is cost recovery. Proprietary funds report activities that operate similar to private-sector businesses, where the intent is to recover costs through user charges (Texas Comptroller of Public Accounts, Reporting Requirements for Annual Financial Reports, Proprietary Funds).
Note the word intent. The test is what the activity is set up to do, not whether it broke even this year, which is why a utility that ran a deficit is still an enterprise activity.
The Basis, and Why It Is Not the Governmental One
Proprietary funds are presented using the economic resources measurement focus and the full accrual basis of accounting, and they are reported the same way as in the government-wide financial statements (Washington State Auditor’s Office, BARS GAAP Manual, Proprietary Funds Financial Statements).
That approach provides a comprehensive view of the activity’s financial position and the full cost of operations, including capital assets and long-term liabilities (Texas Comptroller, Proprietary Funds).
Both halves of that sentence are the point. A government’s own programs report on the modified accrual basis in the governmental funds, and depreciation expense is not recorded for governmental funds under that basis (Texas Comptroller, Modified Accrual Basis of Accounting). A proprietary fund does the opposite: it capitalizes and depreciates, and it carries the long-term debt, because the whole reason for the fund type is to show what the activity actually costs to run.
The Two Types, and How They Are Presented
Enterprise funds and internal service funds are both proprietary, and the reporting rules separate them.
Internal service funds should be reported as a fund type, aggregated, in a separate column. Major enterprise funds are reported in separate columns, nonmajor enterprise funds are aggregated in a single column, and a combined total column for all enterprise funds is presented. Reporting the internal service funds separately is what lets the totals column flow directly to the business-type activities column on the government-wide statement of net position (Washington State Auditor’s Office, BARS GAAP Manual).
The split runs into the major-fund rules as well. Major fund reporting is applied to governmental funds and enterprise funds, and internal service funds are excluded from the major fund reporting requirements (NCES, Chapter 4).
So an internal service fund is never presented on its own face, however large it grows. The reason sits in the sentence above: keeping it out of the enterprise totals is what makes those totals agree with the business-type activities column on the government-wide statement.
The Three Statements, and the Cash Flow Rule That Catches People Out
A proprietary fund files a statement of net position, a statement of revenues, expenses and changes in net position, and a statement of cash flows, which together report financial position, operating performance and liquidity (Texas Comptroller, Proprietary Funds).
The third one carries a requirement that surprises accountants arriving from private practice. The statement of cash flows for proprietary funds is presented using the direct method of cash flows from operating activities, and it must include a reconciliation of operating cash flows to operating income (the same source).
Direct is required, not permitted. A private company overwhelmingly presents the indirect reconciliation and stops there, so a preparer moving onto a governmental engagement has to build the operating receipts and payments the indirect method never asks for, and then produce the reconciliation as well rather than instead.
The operating statement carries its own layout rule. Governments must break out noncapital subsidies from other nonoperating revenues and expenses, and the format adds a subtotal for operating income or loss and noncapital subsidies together, before the other nonoperating items are displayed (Texas Comptroller, Proprietary Funds). Which revenues count as operating in the first place is a required split in these funds, worked through in non-operating revenue.
Where It Sits Among the Fund Types
Three categories divide the whole of governmental fund reporting. Governmental funds report the government’s programs. Proprietary funds report the government’s business-type activities. Fiduciary funds report assets the government holds for somebody else and cannot spend on its own programs, which is fiduciary funds.
Common Questions
Enterprise funds and internal service funds. Both use the economic resources measurement focus and the full accrual basis, and the reporting rules present them differently.
Yes. They run on the full accrual basis and carry capital assets and long-term liabilities, which is the difference between them and the governmental funds, where depreciation expense is not recorded.
No. A proprietary fund reports the government’s own activity. A fiduciary fund reports resources that belong to somebody else and cannot support the government’s programs.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade a real block of that work on its own files through a trial task before any client file moves.
