18.3 Internal Balances (Due To / Due From)
Key Takeaways
- Government-wide financial statements (Statement of Net Position and Statement of Activities) utilize the economic resources measurement focus and full accrual basis of accounting, presenting operational accountability for Governmental Activities, Business-Type Activities, and Discretely Presented Component Units.
- GASB 34 mandates a comprehensive reconciliation bridging the fund financial statements (current financial resources, modified accrual) to the government-wide statements (economic resources, full accrual) for both balance sheet equity and operating changes.
- The Statement of Activities uses a net expense/revenue format where functional program expenses are offset by program revenues (charges for services, operating grants, and capital grants); all taxes—even dedicated or earmarked taxes—must be reported as General Revenues.
Last updated: September 2026
1. Internal Balances (Due To / Due From)
- Within the Same Column: Interfund receivables and payables between governmental funds are eliminated within the Governmental Activities column. Similarly, receivables and payables between enterprise funds are eliminated within the Business-Type Activities column.
- Between Columns: Any residual interfund balance between a governmental fund and an enterprise fund cannot be eliminated within the individual columns. Instead, it is netted and reported on a single line item titled Internal Balances on the Statement of Net Position (reported as an asset in one activity and an equal liability in the other). In the Total Primary Government column, this internal balance nets to exactly zero.
2. Internal Transfers
- Transfers between governmental funds are eliminated within Governmental Activities.
- Transfers between enterprise funds are eliminated within Business-Type Activities.
- Transfers between Governmental Activities and Business-Type Activities (e.g., an annual general fund operating subsidy to the municipal transit enterprise fund) are reported on the Statement of Activities under General Revenues as Transfers (a positive amount in one column, a negative amount in the other). In the Total Primary Government column, transfers net to zero.
3. Internal Service Funds (ISF) Look-Back Allocation
Internal Service Funds (such as centralized motor pools, IT data centers, or self-insurance funds) predominantly serve operating departments within the primary government. Under GASB 34:
- Because ISFs primarily serve governmental funds, the assets and liabilities of ISFs are consolidated into the Governmental Activities column.
- The Look-Back Method: To ensure that the government-wide statements do not overstate or understate functional program expenses, the net operating profit or loss generated by an ISF is eliminated through a "look-back" allocation. The excess revenue (profit) or deficit (loss) charged by the ISF is allocated back to the participating customer functions based on their relative usage during the fiscal year, effectively adjusting the ISF's net operating income to zero.
Reconciling Fund Statements to Government-Wide Statements
Because governmental funds are reported using the modified accrual basis and current financial resources focus, while governmental activities are reported using full accrual and economic resources, GASB Statement No. 34 mandates an explicit mathematical reconciliation between the two perspectives. The reconciliation can be presented on the face of the fund statements or in an accompanying schedule immediately following.
Reconciliation 1: Balance Sheet Fund Balance to Statement of Net Position
This schedule reconciles Total Fund Balances of Governmental Funds to Net Position of Governmental Activities.
&\textbf{Total Governmental Fund Balances (Modified Accrual)} \\ \mathbf{+} & \text{ Capital Assets used in governmental activities (not reported in funds)} \\ \mathbf{-} & \text{ Accumulated Depreciation and Amortization on capital assets} \\ \mathbf{-} & \text{ General Long-Term Liabilities (bonds, notes, compensated absences, pensions/OPEB)} \\ \mathbf{-} & \text{ Accrued Interest Payable on long-term debt (not matured at year-end)} \\ \mathbf{+} & \text{ Net Position of Internal Service Funds serving governmental activities} \\ \mathbf{+} & \text{ Deferred Inflows for Unavailable Revenues (earned but not available within 60 days)} \\ \mathbf{+} & \text{ Deferred Outflows of Resources related to pensions, OPEB, and debt refundings} \\ \mathbf{-} & \text{ Deferred Inflows of Resources related to pensions, OPEB, and debt refundings} \\ \mathbf{=} & \textbf{Net Position of Governmental Activities (Full Accrual)} \end{aligned}$$ ### Reconciliation 2: Operating Changes in Fund Balance to Change in Net Position This schedule reconciles the **Net Change in Fund Balances — Total Governmental Funds** to the **Change in Net Position of Governmental Activities**. $$\begin{aligned} &\textbf{Net Change in Fund Balances — Total Governmental Funds} \\ \mathbf{+} & \text{ Capital Outlays reported as expenditures in funds (capitalized on gov-wide)} \\ \mathbf{-} & \text{ Depreciation and Amortization Expense recognized on government-wide} \\ \mathbf{-} & \text{ Net Book Value of capital assets sold or retired during the year} \\ \mathbf{-} & \text{ Debt Proceeds from bonds/notes issued (other financing sources in funds; liability on gov-wide)} \\ \mathbf{+} & \text{ Bond Principal Repayments (expenditures in funds; reduction of liability on gov-wide)} \\ \mathbf{+} & \text{ Amortization of Bond Discounts (or } - \text{ Amortization of Bond Premiums)} \\ \mathbf{+} & \text{ Net Change in Unavailable Revenues (earned in current year but deferred in funds)} \\ \mathbf{-} & \text{ Prior-year unavailable revenues collected in current year and recognized in funds} \\ \mathbf{-} & \text{ Increase in Accrued Interest Payable on long-term debt} \\ \mathbf{-} & \text{ Increase in Noncurrent Liabilities (compensated absences, claims, pension/OPEB expenses)} \\ \mathbf{+} & \text{ Net Operating Income of Internal Service Funds allocated to governmental activities} \\ \mathbf{=} & \textbf{Change in Net Position of Governmental Activities (Full Accrual)} \end{aligned}$$ ### Comprehensive Reconciliation Matrix | Transaction / Event | Governmental Fund Treatment (Modified Accrual) | Government-Wide Treatment (Full Accrual) | Direction of Reconciliation Adjustment | | :--- | :--- | :--- | :--- | | **Capital Asset Purchase** | Capital Outlay Expenditure | Capital Asset Added to Balance Sheet | **Add** to Fund Balance Change (+ Net Position) | | **Annual Depreciation** | Not Recognized | Operational Depreciation Expense | **Subtract** from Fund Balance Change (- Net Position) | | **Issuance of Bonds** | Other Financing Source (Proceeds) | Long-Term Debt Liability Incurred | **Subtract** from Fund Balance Change (- Net Position) | | **Bond Principal Payment** | Debt Service Expenditure | Reduction of Long-Term Debt Liability | **Add** to Fund Balance Change (+ Net Position) | | **Accrued Interest on Bonds** | Not Recognized until due/payable | Accrued Interest Payable & Expense | **Subtract** from Fund Balance Change (- Net Position) | | **Property Tax > 60 Days** | Deferred Inflow (Unavailable Revenue) | Recognized as Current-Year Revenue | **Add** to Fund Balance Change (+ Net Position) | | **Sale of Capital Asset** | Other Financing Source (Total Proceeds)| Gain/Loss = Proceeds minus Book Value | **Subtract** Net Book Value from Fund Balance Change | --- ## Practical Public Finance Scenario: Complete Year-End Reconciliation To master how these conversion mechanics function on the CGFM examination, review the following municipal accounting reconciliation: > **Scenario**: The City of Fairview reports a **Net Change in Fund Balances of $4,200,000** across all governmental funds for the year ended December 31, 2025. The city's accounting records disclose the following transactions during the fiscal year: > 1. Capital outlays in the General and Capital Projects funds totaled $6,800,000. > 2. Total governmental depreciation expense for the year was $3,100,000. > 3. The city sold an old public works garage for $500,000 cash (recorded as an other financing source in the General Fund). The garage originally cost $1,200,000 and had accumulated depreciation of $900,000 at the date of sale. > 4. The city issued $5,000,000 in 20-year general obligation bonds at par to finance storm sewer construction (recorded as an other financing source in the Capital Projects Fund). > 5. The Debt Service Fund paid $1,600,000 in general obligation bond principal and $450,000 in interest. > 6. Accrued interest on general obligation bonds unrecorded in the funds was $80,000 at December 31, 2024, and $110,000 at December 31, 2025. > 7. Property taxes collected more than 60 days after year-end were deferred as unavailable revenue in the funds: $600,000 at year-end 2024 and $750,000 at year-end 2025. > 8. The city's internal service fund (fleet services) had net operating income of $180,000, of which $150,000 was generated from billings to governmental departments. ### Step-by-Step Mathematical Reconciliation To calculate the **Change in Net Position of Governmental Activities**: 1. **Base Fund Balance Change**: $\mathbf{+\$4,200,000}$ 2. **Capital Outlays**: $+\$6,800,000$ (capital expenditures are capitalized as assets rather than expensed). 3. **Depreciation Expense**: $-\$3,100,000$ (depreciation reduces capital assets and increases expenses). 4. **Sale of Capital Garage**: $-\$300,000$. The garage had a net book value (NBV) of $\$1,200,000 - \$900,000 = \$300,000$. The fund recorded total proceeds of $\$500,000$. On the government-wide statement, the gain is $\$500,000 - \$300,000 = \$200,000$. Subtracting the $\$300,000$ NBV converts the $\$500,000$ fund proceeds into the $\$200,000$ full-accrual gain. 5. **Bond Proceeds**: $-\$5,000,000$. Fund proceeds are other financing sources, but represent a long-term liability under full accrual. 6. **Bond Principal Repayment**: $+\$1,600,000$. Fund debt service expenditures reduce bond liabilities rather than constituting expenses under full accrual. 7. **Change in Accrued Interest Payable**: $-\$30,000$. Accrued interest increased from $\$80,000$ to $\$110,000$, resulting in an additional $\$30,000$ in interest expense under full accrual. 8. **Change in Unavailable Property Tax Revenue**: $+\$150,000$. Current year deferred unavailable taxes ($ \$750,000$) minus prior year deferred taxes recognized in the fund this year ($ \$600,000$) equals a net increase of $\$150,000$ in revenue earned under full accrual. 9. **Internal Service Fund Operating Income**: $+\$150,000$. Fleet management operating profit from governmental funds is allocated to governmental activities. $$\begin{aligned} \textbf{Change in Net Position} &= \$4,200,000 + \$6,800,000 - \$3,100,000 - \$300,000 - \$5,000,000 \\ &\quad + \$1,600,000 - \$30,000 + \$150,000 + \$150,000 \\ &= \mathbf{+\$4,470,000} \end{aligned}$$ Through this systematic conversion, financial statement users can trace precisely how modified-accrual budgetary fund operations translate into full-accrual economic growth.Test Your Knowledge
When preparing the mandatory reconciliation from the governmental fund financial statements (modified accrual) to the government-wide financial statements (full accrual), how is the repayment of general obligation bond principal reported?
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D