SECTION XII--INTERPRETATIONS
INTERPRETATIONS
ACCOUNTING INTERPRETATION NO. 1
Subject: Accounting for Unemployment Insurance Benefits
This interpretation is intended to clarify accounting for unemployment insurance benefits.
A municipality has two primary methods of insuring for unemployment benefits:
(1) Pay into the state system on a regular basis.
(2) Reimbursable or self-insured.
Procedures for Option Number 1:
Treat the employer contribution as an employee benefit. The rate is determined by
current statutes (SDCL 61-1 through 61-6) with payments made to the state on a
quarterly basis. After three years the state will evaluate the experience of individual
entities and make rate adjustments accordingly.
Procedures for Option Number 2:
When unemployment benefits are paid to former employees, the previous employer is
billed (at the end of each quarter) by the state system for the actual benefits paid to the
applicants.
Thus, each municipality must estimate the amount of benefits to be paid and establish a
rate. If an Unemployment Insurance Trust Fund is established the contribution should
be treated as an operating transfer and the budget charged accordingly. The money is
transferred to the trust fund and billings for actual unemployment benefits are disbursed
from the trust fund. However, the municipality may elect to pay these actual benefits
directly from the General Fund. Any liability for the next year’s estimated benefits
payable would only have to be recorded in the General Fund at December 31 each year
if these estimated amounts are deemed to be material to the General Fund.
Employers choosing Option Number 1 may switch to Option Number 2 at the beginning
of any taxable year, provided thirty days’ notice is given to the state prior to the switch.
Option Number 2 employers must remain reimbursable for a minimum of two years
before switching. Employers switching from Option Number 2 to Option Number 1 may
face a double liability for up to 18 months.
The object code for unemployment benefits is 416 and can be found in the Chart of Accounts.
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ACCOUNTING INTERPRETATION NO. 2
Subject: Interfund Transactions
Basically there are five (5) categories of interfund transactions.
(1) Quasi-External Transactions. Transactions that would be treated as revenues,
expenditures, or expenses if they involved organizations external to the governmental
unit--e.g., payments in lieu of taxes from an Enterprise Fund to the General Fund;
Internal Service Fund billings to departments; routine employer contributions from the
General Fund to a Pension Trust Fund; and routine service charges for inspection,
engineering, utilities, or similar services provided by a department financed from one
fund to a department financed from another fund--should be accounted for as revenues,
expenditures, or expenses in the funds involved. These frequently give rise to short-
term interfund debt reported in “Due to _____”/”Due from _____” accounts. GASB 34
now refers to this type of activity as "reciprocal interfund activity" which will
consist of interfund loans and interfund service provided and used. Interfund
services provided and used are to be reported as external transactions, as ie,
revenue and expenditures/expenses.
(2) Reimbursements. Transactions which constitute reimbursements of a fund for
expenditures or expenses initially made from it which are properly applicable to another
fund--e.g., an expenditure properly chargeable to a Special Revenue Fund was initially
made from the General Fund, which is subsequently reimbursed--should be recorded as
expenditures or expenses (as appropriate) in the reimbursing fund and as reductions of
the expenditure or expense in the fund that is reimbursed.
(3) Residual Equity Transfers. Nonrecurring or nonroutine transfers of equity between
funds (e.g., contribution of Enterprise Fund or Internal Service Fund capital by the
General Fund, subsequent return of all or part of such contribution to the General Fund,
and transfers of residual balances of discontinued funds to the General Fund or a Debt
Service Fund). This account will be replaced by accounts entitled "transfers in" or
"transfers out" for entities implementing GASB 34. Transfers to an Enterprise
Fund or Internal Service Fund will be reported as a contributions revenue for
transfers which involve capital assets.
(4) Operating Transfers. All other interfund transfers (e.g., legally authorized transfers
from a fund receiving revenue to the fund through which the resources are to be
expended, transfers of tax revenues from a Special Revenue Fund to a Debt Service
Fund, transfers from the General Fund to a Special Revenue or Capital Projects Fund,
operating subsidy transfers from the General or a Special Revenue Fund to an
Enterprise Fund, and transfers from an Enterprise Fund other than payments in lieu of
taxes to finance General Fund expenditures.) This account will be replaced by
accounts entitled "transfers in" or "transfers out" for entities implementing GASB
34.
(5) Interfund Loans (Advances). Movements of money between funds representing short-
term loans should be reflected by “Due to _____ Fund” and “Due from _____ Fund”
asset and liability accounts. Movements of money representing a loan extending
beyond one year should be reflected as an “Advance to _____ Fund” asset account
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from the fund loaning the cash and also reflect a fund balance reserve for the loan in the
equity section of the balance sheet general ledger account. The fund receiving the
long-term loan should reflect the liability account “Advance from _____ Fund.” The
accounting entries for interfund loans would be as follows: The fund loaning the
money would debit "Due from _________ Fund" or "Advance to _________ Fund"
and credit "cash." The fund receiving the loan would debit "cash" and credit
"Due to _______ Fund" or "Advance from ______ Fund." A transfer is not
recorded for these interfund loans. For entities implementing GASB 34, the
interfund receivables and payables should be eliminated in the governmental and
business type activities columns of the statement of net assets, except for the net
residual amounts due between governmental and business type activities, which
should be presented as "internal balances." Accounts receivable or payable from
a fiduciary fund should instead be reported as receivables and payables to
external parties in the statement of net assets.
Interfund transactions not covered explicitly above should be reflected according to their
substance and with due regard for adequate disclosure.
Interfund transfers should be distinguished from revenues, expenses, or expenditures in
financial statements. Residual equity transfers should be reported as additions to or
deductions from the beginning fund balance of governmental funds. Residual equity
transfers to proprietary funds should be reported as additions to contributed capital;
those from proprietary funds should be reported as reductions of retained earnings or
contributed capital, as appropriate in the circumstances. Operating transfers should be
reported in the “Other Financing Sources (Uses)” section in the statement of revenues,
expenditures, and changes in fund balance (governmental funds) and in the “Operating
Transfers” section in the statement of revenues, expenses, and changes in retained
earnings (proprietary funds). Operating transfers thus affect the results of operations in
both governmental and proprietary funds. GASB 34 transfers in and transfers out
should be reported as other financing sources or uses on the fund financial
statements. However, they are shown as part of general revenues and transfers
in the government-wide financial statements.
ACCOUNTING INTERPRETATION NO. 3
Subject: Encumbering
Encumbrances may be utilized to charge goods and services ordered, but not yet received at
the end of the year, against the current year’s appropriations. A simpler way of accounting for
these encumbered items is to supplement the next year’s appropriations if the amounts
involved are too large to be absorbed by the amounts already appropriated for the next year.
However, if encumbrances are to be utilized, this interpretation clarifies those items that may or
may not be encumbered and the accounting treatment necessary to accomplish that process.
SDCL 9-21-24.1 states:
The governing body may by resolution not later than its first meeting in February
encumber that portion of unexpended appropriations from the prior year for which
applicable obligations were incurred but were not paid. The resolution shall state the
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appropriation account and amount encumbered. The auditor, clerk or finance officer
shall keep a detailed listing by payee and amount supporting such amount shown in the
resolution for examination at the time of audit.
The following is a definition of “encumbrance”:
Purchase orders, contracts or other commitments which are chargeable to an
appropriation and for which a part of the appropriation is reserved. They cease to be
encumbrances when paid or actual liability is incurred.
In accordance with SDCL 9-21-24.1 and the encumbrance definition the only items that can be
encumbered are outstanding purchase orders for which a legal obligation exists, contracts
and/or other legal obligations (provided a detailed listing is maintained) for which service has
not been received either in part or in full as of the close of the fiscal year. At the time of
receiving the contracted service or a fulfilled purchase order they then become payables and,
thus, cease to be encumbrances.
The entries to record encumbrances at the end of the fiscal year (e.g., 2001) are as follows:
Encumbrances xx
Reserve for Encumbrances xx
The Encumbrance account balance is then closed out to Fund Balance at the end of the fiscal
year, as follows:
Fund Balance xx
Encumbrances xx
The Reserve for Encumbrances account is not closed out; it is this account which is charged,
by means of a separate Expenditures account (Prior Year Expenditures), with the actual
expenditures when they occur.
When goods or services are received in the subsequent fiscal year (e.g., 2002) which were
encumbered in the previous fiscal year (2001), the entries to record the expenditures are:
Prior Year (20xx) Expenditures xx
Cash xx
The specially designated prior Year Expenditures account is used to differentiate this particular
expenditure from the current year’s expenditures.
After all orders encumbered in the previous year have been received and recorded, the Prior
Year Expenditure account is closed out against the Reserve for Encumbrances account as
follows:
Reserve for Encumbrances xx
Prior Year Expenditures xx
If the actual cost of the goods or services encumbered exceeds the amount encumbered, the
excess amount is debited to current year expenditures. If the actual cost is less than the
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amount encumbered, the difference is credited to Fund Balance and reported as a prior period
adjustment to Fund Balance.
ACCOUNTING INTERPRETATION NO. 4
Subject: Powers of Municipal Board vs. Library Board
Municipal Board:
A Municipal Board body may budget money in lump sum for library use. The Municipal Board
may raise or lower this lump sum budget each year depending on the outcome of budget
negotiations with the Library Board. The Municipal Board does not have the authority to give
specific direction of library expenditures for amounts such as books and computers. Based
upon recent legislation, the municipal governing board are to set salaries and benefits of
library personnel.
Library Board:
The Library Board has authoritative power over fines, grants and bequests entrusted to them.
The Library Board may make expenditures and keep various bank accounts concerning these
monies without approval from the Municipal Board. However, the Library Board must make full
accounting of these funds to the Municipal Board in an annual report at the end of the year.
The Library Board also has the authority to direct the expenditures of dollars budgeted by the
Municipal Board for library purchases. The Library Board may hire staff that will be paid from
the Municipal Board budget. The Library Board may also buy supplies and pay other bills from
dollars budgeted to them by the Municipal Board. However, the Library Board must stay within
the overall budget set by the governing body. If the Library Board runs short during the year,
they may either ask the Municipal Board for a budget increase, dip into their fines money or
curtail expenditures to get through the remainder of the year.
The Library Board may also apply for and administer library grants without the approval or
intervention of the Municipal Board. However, as is the case with all governmental grants,
these grants would be subject to audit as applicable.
The Library Board is required to file an annual report with the Municipal Board of the
municipality. This information should be filed in a timely manner so that its data may be merged
with the entity wide annual report.
Source: SDCL 14-2, AGR 82-33 and AGR 81-39.
ACCOUNTING INTERPRETATION NO. 5
Subject: Accounting for Long-Term Liabilities
General obligation bonds and other forms of long-term debt which are supported by general
revenues are obligations of the municipality as a whole and not its individual funds. The
amount of unmatured long-term liabilities should be recorded and accounted for in the
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General Long-Term Liability Accounts. Long-term debt of an enterprise fund which is to be
retired from the operations of the enterprise fund is not recorded as a liability of the General
Long-Term Liability Accounts. The obligation for general obligation bonds should never
appear in more than one fund or account group.
Whenever general obligation debt is incurred, the liability is recorded in the General Long-Term
Liability Accounts by a credit to accounts such as bonds payable or installment purchases
contracts payable. The debits are Amount Available for Payment of Long-Term Liabilities and
Amount to be Provided for Payment of Long-Term Liabilities.
After the debt has been recorded, transactions in the General Long-Term Liability Accounts
parallel those in the appropriate Debt Service fund if a Debt Service Fund is established. An
increase in the Debt Service Fund balance is reflected in the General Long-Term Liability
Accounts by a debit to Amount Available for Payment of Long-Term Liabilities and a credit to
Amount to be Provided for Payment of Long-Term Liabilities.
As debts are retired by a Debt Service Fund, a simultaneous entry is made in the General
Long-Term Liability Accounts debiting the account for the type of debt payable and crediting
Amount Available for Payment of Long-Term Liabilities.
ACCOUNTING INTERPRETATION NO. 6
Subject: Capital Outlay Accumulations
This interpretation is to outline a uniform procedure for budgeting and accounting for the three
types of capital outlay accumulations as authorized by SDCL 9-21-14.1 and 9-21-14.2, 9-21-31,
and 9-21-12.
CAPITAL ACCUMULATIONS RESERVE - Municipalities are authorized to accumulate funds for
capital outlay purposes by resolution of the governing body (SDCL 9-21-14.1). The resolution
must be enacted by a two-thirds vote and must set forth clearly the purposes and maximum
amount of the accumulation. The funds accumulated must be expended within sixty months
from the date of the resolution (SDCL 9-21-14.2).
The maximum capital outlay accumulations per SDCL 9-21-14.1 shall be as follows:
(1) In first-class municipalities the amount of the accumulation for all purposes may
never exceed an amount equivalent to four dollars per thousand dollars of
assessed value of all property within the municipality;
(2) In second-class municipalities the amount of the accumulation for all purposes
may never exceed an amount equivalent to ten dollars per thousand dollars of
assessed value of all property within the municipality or one hundred twenty-five
thousand dollars, whichever is greater;
(3) In third-class municipalities the amount of the accumulation may never exceed
one hundred twenty-five thousand dollars.
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CAPITAL REPLACEMENT RESERVE - SDCL 9-21-31 allows a municipality by ordinance to
create a capital replacement reserve fund/account for general fixed assets, which reserve shall
not exceed fifty percent of the value of the general fixed assets.
DEPRECIATION RESERVE - SDCL 9-21-12 allows a municipality to create a depreciation
reserve by resolution within each proprietary fund, as necessary, not to exceed the
accumulated depreciation of the fixed assets of the respective funds.
Budgeting:
The years in which resources are being accumulated for future capital outlay expenditure, the
appropriation ordinances should describe the accumulations as shown at Section VI, Illustration
5. Total appropriations for expenditures and total appropriations for accumulations should
equal total means of finance. The year the accumulations are to be expended, the amount to
be expended should be included in the appropriate budget account as an expenditure and the
resources available, or previously accumulated, should be included in the means of finance.
Accounting:
Capital outlay accumulations should be recorded into respective Designations for Capital Outlay
Accumulations in account numbers 262.03 and 262.04 in the General Fund and account
number 253.26 in the enterprise funds.
The accounting entries to record the designations are as follows:
Governmental Funds:
Undesignated Fund Balance xx
Fund Balance
Designated for Capital Outlay
Accumulations xx
To establish a fund balance designation for capital outlay accumulations GAAP requires a
designation account to be established so that unreserved fund balance only represents financial
resources available for appropriations.
For Government-Wide finance statements, General Fund designations should be
reported as an unrestricted net asset.
Periodically, each year as additional monies are raised, the above entries may be made to
increase the balance of the designation. Each year the amount to be accumulated should be
built into the annual budget.
Resources for the capital outlay accumulations can be derived from the General Fund tax levy,
unobligated cash on hand or by authorized transfers of surplus monies from other funds.
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ACCOUNTING INTERPRETATION NO. 7
Subject: Accounting for and Reporting Taxes Receivable, Tax Revenue and Estimated
Uncollectible Taxes Receivable.
Taxes receivable and tax revenue can be properly accounted for and reported as follows:
We suggest to maintain the governmental funds’ general ledger on the cash basis throughout
the year and adjust it to the modified accrual basis at December 31, the following entries should
be made:
(1) Current Taxes Receivable xx
Deferred Revenue xx
This entry is made at the time the tax levies are certified to the county auditor, but no later than
December 31 each year. The amounts recorded should equal the levies spread by the county
auditor.
(2) Cash xx
Tax Revenue xx
This entry is made each month as the current taxes are collected and remitted to the
municipality by the county.
(3) Deferred Revenue xx
Current Taxes Receivable xx
This entry is made December 31 each year to reduce current taxes receivable and deferred
revenue equal to the amounts received from the county auditor for current taxes between
February 1 and December 31 of that year.
(4) Delinquent Taxes Receivable xx
Current Taxes Receivable xx
This entry is made December 31 each year to move the remaining uncollected current year’s
taxes receivable from current taxes receivable to delinquent taxes receivable.
ACCOUNTING INTERPRETATION NO. 8
Subject: Accounting for and Reporting Compensated Absences
Compensated absences are absences for which employees will be paid, such as vacation, sick
leave and sabbatical leave. The standards for recording and reporting come from the
Governmental Accounting Standards board (GASB) Statement No. 16.
The compensated absences liability should be calculated based on the pay or salary rates in
effect at the balance sheet dates or as agreed upon based on contract, regulation or policy.
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In addition, amounts should be accrued as a liability for salary-related payments (employer
benefits) associated with the payment of compensated absences, such as social security and
state retirement, using the rates in effect at the balance sheet date. The accrual should be
made based on the entire liability for each type of compensated absence to which the salary-
related payments apply.
Vacation Leave:
Vacation leave and other compensated absences with similar characteristics should be accrued
as a liability as the benefits are earned by the employees if both of these conditions are met:
(a) The employees’ rights to receive compensation are attributable to services
already rendered.
(b) It is probable that the employer will compensate the employees for the benefits
through paid time off or some other means, such as cash payments at
termination or retirement.
An employer usually would accrue a liability for vacation leave and other compensated
absences with similar characteristics that were earned but not used during the current or prior
periods and for which employees can receive compensation in a future period. Benefits that
have been earned but that are expected to lapse and thus not result in compensation to
employees should not be accrued as a liability.
Sick Leave:
A liability for sick leave and other compensated absences with similar characteristics should be
accrued using one of the following termination approaches:
(a) A liability should be accrued as the benefits are earned by the employees if it is
probable that the employer will compensate the employees for the benefits
through cash payments conditioned on the employees termination or retirement.
Accrual for earned sick leave should be made only to the extent it is probable
that the benefits will result in termination payments, rather than taken as
absences due to illness or other contingencies and would generally be an
estimate.
(b) Alternatively, a governmental entity should estimate its accrued leave liability
based on the sick leave accumulated at the balance sheet date by those
employees who currently are eligible or are expected to be eligible to receive
termination payments.
Sabbatical Leave:
The accounting for sabbatical leave depends on whether the compensation during the
sabbatical is for service during the period of the leave or instead for past service. A liability
should be accrued during the period the employees earn the right to the leave if it is probable
that the employer will compensate the employees for the benefits through paid time off or some
other means.
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Compensated Absences in Governmental Funds:
If the conditions above are met, the amount of compensated absences recorded as
expenditures in governmental funds shall be the amount accrued during the year that would
normally be liquidated with available expendable financial resources.
Because governmental fund balance sheets do not reflect long-term liabilities, only the current
portion of the entire liability should be reported in the specific fund. The current portion is the
amount left unpaid at the end of the reporting period that would normally be liquidated with
available expendable resources. (This amount would be so minimal in most municipalities that
reporting would be optional.) The remainder of the liability should be reported in the General
Long-Term Liability Accounts.
Compensated Absences in Proprietary Funds:
If the conditions above are met, a fund liability should be recorded for the entire liability. The
amount to be expensed during the year should be the amount of leave earned during the year.
The portion of expenditures in governmental funds and/or expenses in proprietary funds to be
recorded for the year as salaries and wages which are attributable to compensated absences
should be adjusted for leave taken which was available from prior years’ employee leave
earnings, and prior period fund balances in governmental funds and retained earnings balances
in proprietary funds should be adjusted to reflect the reporting principles used in the current
year.
In summarization, the following steps need to be executed to record compensated absences:
(1) The leave policies must be reviewed to determine if the conditions above are all
met.
(2) If a liability exists for compensated absences, the liability must be inventoried at
the end of each accounting period, in hours/days by employee by fund.
(3) The amount of the liability must be determined by multiplying the hours/days of
accumulated unused leave by each employee’s current hourly/daily salary or
other such amount as stipulated by policy.
(4) A determination must be made to ascertain in which funds and functions the
liability is applicable (i.e., governmental funds or proprietary funds.)
(5) For liabilities applicable to governmental funds:
(i) The portion, if any, of the liability which is current must be calculated and
recorded in the proper fund as follows:
Compensated Absence Salary
Expenditure xx
Accrued Leave Payable xx
(ii) The balance of the liability should be reported in the General Long-Term
Liability Accounts as follows:
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Amount to be Provided for Payment
Of Long-Term Liabilities xx
Other Long-Term Liabilities Payable xx
(6) For liabilities applicable to proprietary funds the liability should be recorded as
follows:
Compensated Absence Salary Expense xx
Accrued Leave Payable xx
ACCOUNTING INTERPRETATION NO. 9
Subject: Accounting for and Controlling Video Lottery Revenue
The video lottery presents a unique challenge, not only to players, but also to local government
officials. However, with a little planning and a few additional procedures, the video lottery
program can provide a new revenue source for those cities and towns that have on-sale liquor
licenses.
Because the ability to offer a video lottery game to the public is linked to the possession of a
valid on-sale liquor license, the operations of the video lottery must be accounted for within the
Liquor Fund (an enterprise fund).
The governing body of a municipality may apply to the South Dakota Lottery Commission (the
Lottery) for either an “Operator’s License” or an “Establishment License.” Because of
substantial machine acquisition costs, and the requirement that licensed operators must provide
technicians to repair and service the machines they are licensed to operate, it is not likely that a
municipality will obtain this type of license. It is more likely that a municipal on-sale licensee will
obtain an Establishment License. The establishment license fee is waived the first year it is
issued. Subsequently, the annual renewal fee is $50 unless the establishment also sells instant
ticket lottery game pieces, in which case the annual renewal fee is $10. The governing body
should authorize or apply for the “Establishment License” or “Operator’s License” regardless of
whether or not the municipality manages the on-sale establishment, or has operating
agreements.
Assuming a municipality will not own the video lottery machines, a contract will have to be
entered into with a licensed operator. The contract term should not exceed one year. Topics
covered in the contract might include, but are not limited to: The distribution of net machine
income, after provision for the state’s share; responsibility for loss or damage; receipt, payout
and net machine income information provided the municipality; reimbursement of payouts; and,
frequency of settling accounts.
In situations where the municipality holds the license but does not operate the on-sale store,
operating agreements may need to be amended to discuss whether or not the municipality
participates in the lottery earnings and at what rate. Other amendments concerning liability,
etc., may be needed depending on individual operating agreements currently in force.
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DUTIES OF LICENSED ESTABLISHMENTS:
The South Dakota Lottery Commission has adopted administrative rules that will affect the way
the municipal on-sale establishment is operated. A copy of these rules should be obtained from
the State Lottery Office by calling 773-5770. (Ref. ARSD 48:02) The following provisions are
promulgated in the rules:
- Prohibit machine play by persons under the age of 18 or who are visibly intoxicated.
- Prevent persons from tampering, damaging or interfering with the operation of the
machines.
- Provide a secure location for the placement and play of machines.
- Place the machines in an area within the sight and control of employees from the
location where alcoholic beverages are dispensed.
- Place the machines only in the area of the establishment where alcoholic beverages
are regularly dispensed and consumed in the ordinary course of business. Do not
place them in an area where access to the location is not restricted by age.
- Obey all laws concerning the sale, dispensing and consumption of alcoholic
beverages. Your video lottery establishment license is directly dependent on the
status of your alcoholic beverage license.
- Obey all video lottery laws and rules.
- Have sufficient change and cash on hand at all times both to pay credits as well as for
machine play.
- Do not extend credit for machine play and exercise caution and good judgment in
cashing checks for machine play.
- Report promptly all machine malfunctions to your operator or service agent and, if not
promptly serviced and repaired, to the Lottery.
- Advertise and promote video lottery honestly and in good taste. You must purchase
at least one sign approved by the Lottery that identifies your business as a video
lottery establishment.
- Contract only with licensed operators for machine placement and to share in revenues
from the machines.
- Ensure that the telephone lines to the machines are connected and in operation.
- Promptly report any violation or possible violation of the video lottery laws and rules to
the Lottery.
- Permit the Lottery physical access to the business premises and machine records
during normal business hours or as requested by the Lottery.
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- Conduct your business in a manner that does not pose a threat to the public health,
safety, and welfare of the citizens of the State of South Dakota; that reflects adversely
on the security or integrity of the Lottery; or that harms the video lottery business.
- Assist the Lottery in maximizing revenue to the State.
- Keep current in payments to the Lottery and other persons with whom you conduct
video lottery business.
- Promptly notify the Lottery of any change in ownership of the business. Establishment
licenses are not transferable.
THE FOLLOWING SECTIONS ONLY APPLY TO MUNICIPALITIES THAT OPERATE THEIR
LIQUOR STORE:
Payments of Credits
The governing body should adopt policies to establish and regulate the payment of credits.
Credits on valid tickets must be immediately paid in cash or by check when presented for
payment by a player. You may also pay credits in instant lottery tickets, if requested by a
player.
- No credits may be paid in tokens, chips or merchandise.
- A ticket must be presented for payment before the close of business on the date the
ticket was printed. The Lottery is not responsible for the payment of any credits.
- Payment may only be made on tickets for credits awarded on machines located in
your establishment. The establishment name will appear on each printed ticket.
- Mark the tickets you pay in some way to prevent them from being presented and paid
again.
- In the case of a machine malfunction that is incorrectly awarding credits, contact your
operator or service agent immediately and do not allow any further play on the
machine.
- Prominently display in the area where the machines are located information on the
payment of credits and age restrictions on machine play. The Lottery will provide you
posters with this information.
Suggested systems for the payment of credits are as follows:
CASH BOX - A cash box may be established for the sole purpose of redeeming credits.
The required balance of the cash box should be set by the board.
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TILL - Credit tickets may be redeemed from the cash in the till. The credit tickets would
then constitute a cash item in the till. A transaction should not be registered on the till
when redeeming a credit ticket.
CHECKING ACCOUNT - A checking account may be established at a fixed amount set
by the board. This account could only be used for redeeming credit tickets and should
be established separate from the rest of the city’s money. It may be necessary to
establish several employees to sign as payor to cover the various shifts. Vouchers do
not need to be prepared in support of payments. Also, disbursements from this account
do not need to be published.
COMBINATION - Any combination of the preceding systems may be established by the
board to be used for redeeming credits. For example, small payouts may be made in
cash with the larger payouts being paid by check. This would reduce the amount of
cash that would be necessary to have on hand.
No matter which system is used for the payment of credits, the value of the cash items (credit
tickets) plus the cash should at all times reconcile to the required balance. Since several of the
suggested payout systems will require additional cash to be on hand, an increased awareness
over physical security is strongly suggested. The governing body should also designate a
person to be responsible for the cash involved in the credit redemption process.
FINANCE OFFICER DUTIES
At least once a month, on a random, unannounced basis, the finance officer must audit the
payout system:
If a cash box is used, or the cash change in the till drawer is utilized to accommodate
payouts, the finance officer should perform surprise cash counts to reconcile to the
required balance.
If a checking account is used, the finance officer must reconcile this account to its
required balance. This should encompass at least a review of outstanding checks,
deposits, credit slips and bank statements.
The finance officer will keep and retain all “Audit Ticket” copies for independent audit. The
finance officer should periodically verify the municipalities share of the net income from the
video lottery by performing the following steps:
1. Locate the “Net In” from the audit tickets.
2. Deduct 50% from “Net In” to give the state its share.
3. The remaining balance of “Net In” is then split as predetermined on the contract
between the Municipality (Establishment) and the Operator.
4. The municipality’s share should then be reconciled to the amount rung up on the
till.
5. Variances should be determined and resolved.
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Audit tickets summarize the machines activity for the “Period” and also maintains a “Master”
balance representing the total of all “Periods.” The finance officer may verify the presence of all
audit tickets by reconciling the audit tickets from each period to the “Master.”
Evidence of the various cutoffs and reconciliations performed by the finance officer must be
retained for audit.
ON-SALE LIQUOR STORE MANAGER/EMPLOYEE DUTIES
When the video lottery machine is opened by the operator, or his representative, and the cash
box is removed, a liquor store representative must be present to observe and verify the cash
removed.
In the event that machine income does not equal payouts, it is the responsibility of the
“Operator” to make up the difference.
Each video machine is capable of printing an “Audit Ticket” by the turn of a key. The operator
will need a copy of this ticket, and the liquor store/municipality shall receive an additional copy.
Payout slips should be presented to the operator for reimbursement at that time. If a payout
checking account is used, a deposit should be made to bring the balance up to its required
amount. If cash items were removed from the till, the equivalent amount of cash must be
replaced.
The municipalities share of the net income from the machine must be rung up on the cash
register (as a “No Tax” sale) and the money included in the daily deposit. The “Audit Ticket”
copy should be delivered to the municipal finance officer.
Depending upon the payout policy adopted by the governing board, the cash tickets must be
placed in the till as a cash item, or kept on an imprest basis with the check book or cash box.
The liquor store manager shall deposit all receipts intact on a daily basis. Each day’s deposit
should equal gross sales for the day. The change fund balance set by the governing body
should equal the sum of the cash on hand plus payout cash items.
ACCOUNTING INTERPRETATION NO. 10
Subject: Accounting for Accounts Payable in Governmental Funds at December 31
The Municipal Accounting Manual defines accounts payable as “liabilities on open account
owing to private persons, firms or corporations for goods and services received by a
municipality.”
In governmental funds (e.g., General Fund, Special Revenue Funds, Capital Projects Funds)
the recording of accounts payable liabilities at December 31 is influenced by the nature of the
liabilities being recorded. If the liability to be recorded is for goods or services already received
and utilized, the entry to record accounts payable at December 31 on a generally accepted
accounting principle (GAAP) basis is:
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SECTION XII--INTERPRETATIONS
Expenditures xx
Accounts Payable xx
If the liability to be recorded is for goods received but which will not be utilized or consumed
until the following year (e.g., cleaning supplies, paper goods), the entry to record accounts
payable at December 31, is:
Inventory (Account No. 141) xx
Accounts Payable xx
ACCOUNTING INTERPRETATION NO. 11
Subject: Determination of Employee Versus Contracted Service Status
This interpretation is intended to clarify whether a service received and paid for should be
classified as wages paid or a contracted service.
Numerous situations arise that call for a decision as to whether or not a person performing a
service for the municipality is actually an employee of the municipality. Each of these instances
are unique but a common approach can be applied in making that determination.
If the municipality simply pays someone an hourly wage to perform the service, that person is
probably an employee of the municipality and the amount paid to them is wages which are
subject to all applicable federal rules and regulations regarding federal income tax withholding,
matching of social security, and the preparation of a Form W-2. If someone is paid a flat fee for
performing a service for the municipality and that person supplies his or her own equipment and
supplies, then that is probably a contracted service and not a wage. In that instance, a form
1099 should be prepared but no federal income tax or social security should be withheld.
One example would be the hiring of someone to mow the grass in the municipal parks. If the
municipality hires someone to mow this grass and the municipality provides the mower, edge
trimmer, gasoline for the equipment and so on and just pays the person $7.00 per hour to
perform this service, this person is a municipal employee. However, if the municipality hires
someone to mow the grass and that person provides his or her own equipment and gasoline to
operate the equipment, and the municipality pays this person $50.00 per week to keep the
grass trimmed, then that person is an independent contractor and this is a contracted service
not subject to withholdings. Such payments would be reported to the IRS with a Form 1099
and not a Form W-2.
Another example would be janitorial services. If the municipality hires someone for $7.00 per
hour to come in and clean city hall with the municipality supplying the cleaning products,
vacuum cleaner and so on, then that person is an employee subject to payroll withholdings and
their earnings would be reported to the IRS with a Form W-2. However, if the municipality pays
someone $100.00 per month to clean city hall and that person provides all their own equipment
and supplies to accomplish the cleaning, then that person is an independent contractor subject
to no withholdings and the amount paid to them would be reported to the IRS with a Form 1099.
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SECTION XII--INTERPRETATIONS
ACCOUNTING INTERPRETATION NO. 12
Subject: Flowchart of Audit Requirements
Entity receives less than Entity spends $300,000 or
$600,000 in annual more in federal financial Entity receives $600,000 or Entity receives less than
revenue, but more than assistance in one year, but more in annual revenue $100,000 in annual
$100,000 in annual receives less than $600,000 revenue
revenue in annual revenue
A-133 Audit for the Financial and compliance
Internal Control Review applicable year (Circular A- audit at least once every Submit annual report to
(SDCL 4-11-4.1) 133 SDCL 4-11-4) two years (SDCL 4-11-4) Auditor General
(SDCL 4-11-4)
Note - per SDCL 4-11-4, the Auditor General may audit the books and records of any office or officer of any political subdivision if it
is requested by the governing body or Auditor General finds that special reasons exists.
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SECTION XII--INTERPRETATIONS
ACCOUNTING INTERPRETATION NO. 13
Subject: Accounting for Leases
Lease-purchase agreements may be in the form of capital or operating leases. A capital lease
is, for the most part, viewed as an installment purchase of property rather than the rental of
property. An operating lease does not involve the purchase of property and payments
represent the rental expenditures. Capital leases exist if ANY of the following conditions are
met.
(a) The lease transfers ownership of the property to the lessee by the end of the
lease term.
(b) The lease contains a bargain purchase option.
(c) The lease term is equal to 75 percent or more of the estimated economic life of
the leased property.
(d) The sum of the principal lease payments equal 90 percent of the fair value of the
asset.
Once it has been determined that a capital lease exists, then the following entries would be
required:
1. Equipment (Acct No. 166) xx
Investments in General Capital Assets (Acct No. 246) xx
To capitalize the present value of the minimum lease payments in the General Capital
Asset Accounts.
2. Expenditure (400 Accounts) xx
Other Financing Source (Acct No. 391.27)
xx
At the start of the lease, the present value of the minimum lease payments must be
recognized as an expenditure against the budget and as an other financing source. The
expenditure category used should relate to the type of asset acquired.
3. Amount to be Provided (Acct No. 187) xx
Other Long-Term Liabilities (Acct No. 237) xx
This entry is necessary to recognize the liability in the General Long-Term Liability
Accounts. The amount capitalized should be the present value of the minimum lease
payments.
4. Expenditure xx
Cash xx
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SECTION XII--INTERPRETATIONS
To record the periodic payments in future periods. The expenditure account to
recognize these payments to service the debt should be account “470 Debt Services.”
If the lease is an operating lease, the lease would be recorded as follows:
Expenditures - Rent xx
Cash (Vouchers Payable) xx
To record the operating lease at the inception of the lease.
ACCOUNTING INTERPRETATION NO. 14
Subject: Accounting for Grant Revenue
GASB 33 establishes accounting and financial reporting standards for shared grant
nonexchange revenues. In a nonexchange transaction, a government gives (or receives)
value without directly receiving (or giving) equal value in return. There are two classes
of nonexchange transactions which relate to grants:
1. Government-Mandated Nonexchange Transactions
2. Voluntary Nonexchange Transactions
On these types of nonexchange transactions, revenues and expenditures should be
recorded when all applicable grant eligibility requirements are met. For transactions in
which the provider requires the recipient to use the resources in or beginning in the
following period, resources provided before that period should be recognized as
advances by the providers and deferred revenues by the recipients.
Federal and state grants are usually either nonreimbursable grants or expenditure-driven
grants. Nonreimbursable grants are usually received up front and recorded as revenue
at the time of receipt and not contingent on incurring an expenditure. Expenditure-
driven grants are nonexchange transactions which require revenue to be recorded after
the expenditures are incurred and are equal to the expenditures.
The following entry would be used to record the nonreimbursable type grants:
1. Cash xx
Revenue xx
To record the revenue collected as it is receipted.
Expenditure-driven grants should recognize revenue when the associated expenditure is
incurred. For grants where the cash is received up-front the entries would be as follows:
1. Cash xx
Deferred Revenue xx
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SECTION XII--INTERPRETATIONS
To record the cash for a grant in which no expenditures have yet been incurred.
2. Expenditure xx
Cash xx
Deferred Revenue xx
Revenue xx
To record grant expenditure and to adjust the revenue to record that portion of deferred
revenue which has been earned by incurring the expenditure.
Expenditure-driven grants that operate on a reimbursement basis should be recorded as
follows:
1. Expenditures xx
Cash xx
Receivable xx
Revenue xx
To record grant expenditure and to record grant revenue and a receivable from the
granting agency equal to the expenditures incurred.
The preceding was based on the assumption that the grant expenditures occurred prior to
December 31. Therefore, the revenue is also recognized and a receivable is established and
will be reported at year end in situations where reimbursements are received in the subsequent
fiscal year.
The schedule of federal financial assistance should be prepared to reflect the federal share of
grant expenditures on the same basis of accounting as the financial statements, unless
footnoted to the contrary.
ACCOUNTING INTERPRETATION NO. 15
Subject: Accounting for Revolving Loan Funds
A number of municipalities are now becoming involved in revolving loan funds. These are
federal grants, that when given to the municipality, are subsequently loaned out to a new
business to be repaid over a period of years. The grant should be recorded and run through a
separate special revenue fund. The accounting entries would appear as follows:
Cash xx
Federal Grants Revenue (331) xx
To record the receipt of the grant from the feds/state.
Notes Receivable (128) xx
Cash xx
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SECTION XII--INTERPRETATIONS
To record the payment of cash to the private business. This entry recognizes a loan
receivable on the municipality’s books. The notes receivable should be only for the
principal of the loan.
Unreserved Fund Balance xx
Fund Balance Reserved for
Notes Receivable xx
Pursuant to GAAP, the notes receivable of the previous entry should always be offset by
reserved fund balance. This is because unreserved fund balance should always
represent financial resources available for appropriation. Since the dollars have been
loaned out and will not be available for a number of years, a reserve should be
established to acknowledge that fact.
The receivable entry and the fund balance entry will be reversed each year when a payment is
made on the loan. The receivable and the fund balance reserve should always equal and
should always represent the remaining balance of the principal of the loan.
Occasionally loans will have interest involved. The interest portion of each loan repayment
should be recognized as revenue when received.
ACCOUNTING INTERPRETATION NO. 16
Subject: Accounting for Tax Incremental Districts
This interpretation is intended to provide uniform guidance for the accounting of transactions
related to Tax Incremental (Financing) Districts that may be established in accordance with
SDCL 11-9.
As a way to finance the cost of certain improvements in areas of municipalities designated to be
slums or blighted areas, Tax Incremental Districts may be created by resolution of the
governing board. Tax Incremental Districts are accounted for within the regular fund structure
of the municipality that creates them.
Tax Incremental Districts derive their name from the dedication of increased tax revenues
generated by (capital) improvements made to alleviate slums and/or blighted areas, in
accordance with a District Improvement Plan. The improvements increase both the property
values and the taxable values of the real property within the district. Improvements in the
District may be financed by available General Funds of the Municipality, or by the issuance of
bonds under SDCL 9-44, 9-54, or 11-9. Tax Increment Financing Bonds are usually issued to
finance the necessary improvements, although notes may also be issued, and available
General Funds of the municipality may be used as well. The increased revenues are dedicated
to retire this debt or to repay the General Fund.
The exact life of a District will vary, depending on the method of financing; however, a Tax
Increment District has a maximum life of 20 years after the last expenditure identified in the
District Improvement Plan has been made, or until all bonds or notes issued pursuant to SDCL
11-9-35 have matured. During its life, the additional tax revenues resulting from the increased
taxable value of the property within the District shall be paid by the County Treasurer to the
municipality that created the District. These “Tax Increment Revenues” must be segregated
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SECTION XII--INTERPRETATIONS
from the other revenues of the municipality, and may be used only to retire monetary
obligations incurred for project costs of the District, or for recovering costs financed by available
General Funds. During the life of the District, the taxable value of the property within the
District that may be taxed by other taxing subdivisions of the State is limited to the tax
incremental base valuation (the value of the property prior to the creation of the Tax Increment
District).
Upon creation of its first Tax Incremental District, the municipality should establish a Capital
Projects Fund to account for the construction of the planned improvements. The name given
the first such fund should be “Tax Incremental District No. 1 Capital Project Fund.” This fund
will have a relatively short life. Proceeds from the issuance of debt issued to finance the
improvements shall be credited to this fund. Additionally, statute allows the governing body of
the municipality to make appropriations to this Fund. Moneys in this Fund may only be used to
pay project costs. Any cash balance remaining in this Fund after all improvement costs have
been paid shall reimburse the General Fund or shall be transferred to a related Debt Service
Fund. Subsequently created Districts shall be numbered consecutively, and separate funds
should be established for each District.
All tax increment revenues generated by the District shall be credited to a Debt Service Fund.
The life of this fund will coincide with the life of the District. Moneys in this fund may only be
used to retire the indebtedness incurred to finance the cost of the improvements. The Debt
Service Fund should be named “Tax Incremental District No. 1 Debt Service Fund,” with
subsequently created funds consecutively numbered.
Statute authorizes the governing body to make appropriations to the District Capital Projects
Fund. Generally, such appropriations would result in transfers from the General Fund to the
Tax Incremental District Capital Projects Fund. However, because statute also allows such
appropriations to be reimbursed, such transactions, if made, should be accounted for as
interfund loans, in accordance with Accounting Interpretation No. 2, unless the governing body
clearly intends that such amounts should not be repaid to the General Fund.
If bonds or notes are issued, the liability should be recorded in the General Long-Term Liability
Accounts. Near the end of the life of the debt issue, the outstanding balance may be reported
in the related Debt Service Fund, but only if resources have been accumulated in an amount
sufficient to meet the final debt service payment(s), consistent with the definition of a current
liability for governmental fund types. Tax Incremental District Bonds or Notes are counted as
debt for the purposes of calculating the constitutional debt limit.
Any moneys remaining in the Debt Service Fund upon termination of the District shall be used
to reimburse the municipality (General Fund) for any voluntary contributions to the fund, and the
balance distributed “to the treasurer of each county, school district, other tax-levying
municipality or to the General Fund of the municipality in such amounts as belong to each
respectively.” We believe this means that any remaining balance in the Tax Incremental District
Debt Service Fund should be apportioned in the same manner as property taxes.
Indebtedness created by tax incremental bonds issued by municipalities pursuant to act
authorizing such bonds is a “debt” of municipality under section of State Constitution placing
certain limitations on such debts, and thus, tax incremental bonds are subject to such
constitutional limitations. Const. Art. 13 § 4; SDCL 11-9-1 et seq. Meierhenry v. City of Huron,
1984, 354 N.W.2d 171.
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