How should financial information for internal service funds be reported in the government-wide financial statements?

• A. Usually as part of governmental activities, unless the internal service fund predominantly serves one or more enterprise funds
• B. As part of business-type activities regardless of service recipients
• C. Not included in government-wide statements
• D. As a separate line item under fiduciary activities

Answer: (A)

In government-wide financial statements, where you classify activities as either governmental or business-type, internal service funds are treated based on who benefits from their services. They are usually reported as part of governmental activities because they provide centralized services to other governmental funds. The interfund charges between funds are eliminated in consolidation, so the internal service fund’s costs end up included with the governmental activities’ totals.

The exception is when the internal service fund predominantly serves enterprise funds. If most of its transactions benefit those enterprise funds, the internal service fund’s activity is considered business-type in nature and would be reported with the business-type activities in the government-wide statements. This aligns the presentation with the economic substance of who the services are serving.