What is the expected standard for reporting internal service funds that primarily provide services to governmental activities?

Internal service funds are established to provide services to other governmental departments or agencies on a cost-reimbursement basis. Since their primary purpose is to deliver services that support governmental activities, the expected standard for reporting these funds is to consolidate them as part of governmental activities. This approach reflects the operational realities and ensures that government-wide financial statements present a coherent view of the overall governmental activities and their interrelationships.

By consolidating internal service funds into the governmental activities category, the financial reporting aligns with the purpose of these funds, which is to promote efficiency and cost-effectiveness within the governmental framework. This enhances the understanding of how resources are utilized across various departments and supports better financial accountability and transparency.

In contrast, options that suggest reporting internal service funds as part of business-type activities or as separate entities do not accurately reflect their operational nature and interconnections with governmental functions. Declaring them inactive would incorrectly imply that they are not currently providing services or contributing to government operations.