Internal Service Funds (ISFs) provide centralized services on a cost-reimbursement basis to departments within a government. The goal is to break even rather than generate a profit. An example is a maintenance department providing equipment maintenance to other departments. Governments must review ISF rates charged and ensure costs are identified accurately. Enterprise Funds account for services provided to the public for a fee, using accrual accounting similar to businesses. Common examples include water, sewer, and electric utilities.

1. Internal Service Funds (ISFs)
To finance, administer, and account for departments or agencies whose
exclusive or nearly exclusive mission is to provide benefits, goods, and
services to the government’s other departments through a single
administrative unit on a cost reimbursement basis, with the goal to
‘break-even’ rather than make a profit. The customers of ISFs are usually
internal customers, but they are often agencies of other governments.
This fund is also called an intergovernmental service fund, working fund,
or revolving fund.

2. An example of an internal service fund is a maintenance department that
provides equipment maintenance services to other departments.
This type of fund is used to identify the cost of providing certain goods
and services. It is also important that governments review the rates they
charge for Internal Service Funds (ISFs).

3. Relationship between Appropriation and Internal Service Funds
Legislative
Body
General and other
budgetary funds
---------------------
Departments / Programs
Appropriation
External expenditure:
 Employees
 External Suppliers
 Contractors
Internal expenditure:
Proprietary Funds
----------------
 Internal Service
Funds
 Enterprise Funds

4. Goals/ Objectives of ISFs
 To provide centralized service;
 Improved resource management;
 To provide better service;
 Cost control/cost reduction;
 To collect cost + expenditure ( Administrative exp./operating exp.);
 To facilitate the equitable sharing of costs among departments
served;
 To attain greater economy, efficiency, and effectiveness in the
acquisition and distribution of common goods and services used by
other departments.

5. Pricing Methods
 Typical choices
• Historical cost
• Direct cost, when other costs are insignificant
 ISFs usually have a monopoly, so pricing needs to be monitored closely
 Excessive charges must be avoided
 Predetermined rates – so much per page, mile, or order. Predetermined rates
are preferred because Departments need to know charges at the time work is
done.
 Charge departments based on actual cost. Actual cost charges may result in
inequitable allocations among departments.
 Inflation rate and purchasing power should be considered.

6. Establishment and operation of ISFs
 General Principles
 Measurement Focus – to improve the financial management of scarce
economic resources
 Basis of Accounting – accrual. Revenues are recognized in the
accounting period in which they are earned and expenses are
recognized when incurred, regardless of the timing of the related cash
flows.

7.  Relation to Budget
An internal service fund normally does not use budgetary accounts.
 Budget may not be used since the level of activity depends on
demand,
 Not predetermined spending by the fund
 All claims and judgments recorded in ISF when incurred – may be a
current or long-term liability.
 Amounts charged to other funds recorded as revenues
 May accumulate reserves for catastrophic losses

8. Establishment and operation of ISFs
Revenue Recognition
 Amounts paid based on actuarial (uncertainty) estimates should be recorded
as revenues;
 Overpayments
• If intended to cover next year’s contribution, record as deferred revenues;
• If not so intended, payment may be a loan, advance, or transfer.
Expense Recognition
 Information prior to issuance of financial statements indicate that it is
probable that an asset was impaired or a liability was incurred at date of
statements. and
 Amount of loss can be reasonably estimated.

9. Establishment and operation of ISFs
Requirements for Using ISFs:
• Recognize all claims & judgments liabilities & expenses in ISF;
• Charge other funds amounts that are reasonable and equitable –
preferably actuarially based – so that ISF revenues and expenses are
approximately equal;
• Accumulated net assets should be disclosed in notes as being
designated for future catastrophic losses;
• Determine whether amounts paid to ISFs that differ from the
required amounts are in substance interfund loans or transfers.

10. Creating an ISF:
1. Transfer from GF:
Cash
Transfer from GF
2. Long-term loan:
Cash
Advance from Gf

11. 3. Bond Issue:
Cash
Bond payable
4. General obligation Bonds:
Net Assets –Unrestricted
Bond Payable

12. Internal Service Funds with manufacturing activities
 Internal service funds may be used to produce products, such as
printed materials or asphalt.
 Depending on the type of manufacturing process, the fund should
have the appropriate type of cost accounts.
 As in an investor-owned manufacturing environment, cost standards
should be developed and variance analysis performed.

13. Internal Service Funds as financing devices
 Internal service funds are also used to finance risk management,
equipment purchases and operations, and other functions.
 Risk management internal service funds are subject to the same basic
guidelines as public entity risk pools.
 Charges to the other funds benefiting from the risk management fund
should be sufficient to cover claim expenses and may include amounts
to provide a cushion for future catastrophic losses.

14. Dissolution of an Internal Service Fund
Mission
Accomplished
Convert noncash
assets to cash
and distribute
Distribute
assets to
another
fund
Transfer assets
to another fund
to continue
activity

15. Enterprise Fund
 An enterprise fund establishes a separate accounting and financial
reporting mechanism for municipal services for which a fee is charged in
exchange for goods or services.
 Under enterprise accounting, the revenues and expenditures of the service
are segregated into a separate fund with its own financial statements,
rather than commingled with the revenues and expenses of all other
governmental activities.
 Financial transactions are reported using standards similar to private-sector
accounting.
 Revenues are recognized when earned and expenses are recognized when
incurred, under a full accrual basis of accounting.

16.  An enterprise fund provides management and taxpayers with
information to measure performance, analyze the impact of financial
decisions, determine the costs of providing a service and identify any
subsidy from the general fund in providing a service.
 Enterprise accounting allows a community to demonstrate to the
public the portion of the total costs of a service that is recovered
through user charges and the portion that is subsidized by the tax levy
or other available funds if any.
 A community may choose to recover total service costs through user
charges, but it is not required.

17. Common Examples of Efs
 Water & Sewer Departments
 Electric Utilities
 Gas Utilities
 Sanitary Sewer Operations
 Garbage and other waste collection & disposal services
 Off-street Parking Lots and Garages
 Solid Waste Landfills
 Airports

18. Interfund Activity
 Most transactions between EFs and Governmental Funds accounted
for as interfund service transactions
 Billings to other departments recorded as operating revenues
 “Free” services provided to other funds recognized as Transfer to
other funds with corresponding revenue
 Interfund transfers are the last item on the operating statement

19. Intergovernmental Grants
 Capital grants restricted to the construction, acquisition, or
improvement of capital assets
Reported on an operating statement as the first item after Income before
other revenues, expenses, and transfers
 Reported in SCF as Capital and Related Financing Activities
 Operating grants are all other grants
 Reported on the operating statement as nonoperating revenues
 Reported on SCF as Noncapital Financing Activities

20. Benefits of Enterprise Funds
 Identifies the total cost of service and related revenues for a service.
 Provides management information to analyze the extent to which
revenues are covering expenditures.
 Retains and maintains investment income and surplus.
 Provides useful information to make decisions on user charges and
other financing items.
 Provides the value of the enterprise’s fixed assets and infrastructure
and recognizes the cost of the annual depreciation of these assets.
 Provides long-term liabilities in the financial statements thus
providing both short and long-term financial perspectives.

21. Implementing Enterprise Funds
The Core Framework The following framework should be followed to
implement enterprise funds. This framework includes:
(1) Establishment of the enterprise fund by the appropriating authority,
(2) Establishment of the enterprise fund budget,
(3) Establishment of the enterprise fund accounting system,
(4) Analysis of current year revenues and expenditures, and
(5) Establishment of the enterprise fund reporting system. Several
enterprise fund best practices are listed for each framework element.
While M.G.L. allows for other general laws and special acts, enterprise
funds are considered to be the best practice for water, sewer, and
stormwater activities. 1

22. Enterprise Funds vs. Internal Service Funds
Enterprise Funds
Used to account for activities that provide goods and services primarily to the public
on a charge basis
If primary customers are internal to the government, should reclassify as Internal
Service Funds
Internal Service Funds
Used to account for activities that provide goods and services to other departments of
the governmental unit
If primary customers are external to the government, should reclassify as Enterprise
Funds

23. When Use of Enterprise Fund Is Required
 Activity is financed with debt that is secured solely by a pledge of the
net revenues from fees and charges of the activity
 Laws or regulations require that the activity’s costs of providing
services, including capital costs (such as depreciation or debt service),
be recovered with fees and charges
 Pricing policies of the activity establish fees and charges designed to
recover its costs, including capital costs

24. Budgeting and Appropriations
 Flexible budgets may be adopted to assist in the control of operations
 Fixed budgets usually adopted because of legal requirements
 Many Efs operate on a budgetary basis during the year and convert to
GAAP at year-end

25. Interfund Activity
 Most transactions between EFs and Governmental Funds accounted
for as interfund service transactions.
 Billings to other departments are recorded as operating revenues.
 “Free” services provided to other funds recognized as Transfer to
other funds with corresponding revenue.
 Interfund transfers are the last item on the operating statement.

26. Intergovernmental Grants
 Capital grants restricted to the construction, acquisition, or
improvement of capital assets;
 Reported on the operating statement as the first item after Income
before other revenues, expenses, and transfers;
 Reported in SCF as Capital and Related Financing Activities;
 Operating grants are all other grants;
 Reported on the operating statement as nonoperating revenues;
 Reported on SCF as Noncapital Financing Activities.