In the reconciliation process which of the following would be added to the net change in fund balances to arrive at the change in net position of governmental activities?

• A. Payment of principal on debt
• B. Revenue from taxes
• C. Transfer to other funds
• D. Construction of capital assets

Answer: (D)

The main point is that reconciling the governmental funds with the government-wide (accrual) statements requires adding back and subtracting items that are treated differently under the two measurement bases. Capital asset construction increases the government’s long-term capital stock, and on the government-wide statements these assets are capitalized and depreciated over time. In the governmental funds, however, capital outlays are recorded as expenditures and temporarily reduce net resources. To bridge the gap from the fund-balance change to the change in net position, you add the amount of capital asset construction because it represents a resource increase that is not reflected as an expense in the fund statements but is reflected as an asset (and eventually depreciation) in the government-wide statements.

The other items don’t fit as additions in this reconciliation. Principal debt payments are a financing activity that affects cash and liabilities in a way that’s neutral for net position, so they aren’t added. Revenue from taxes is already reflected in the fund balance and is recognized in the government-wide statements as well, so it isn’t an adjustment you add. Transfers to other funds are internal movements and do not change the government’s net position either, so they aren’t added in the reconciliation.