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Chapter 4

Recognizing Revenues in Governmental Funds

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Thoughts to Ponder: Chapter 4

The thing generally raised on city land is taxes. Charles Dudley Warner

For every benefit you receive a tax is levied. Ralph Waldo Emerson

Taxes are the sinews of the state.  Cicero

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Learning Objectives

Current financial resources and the Modified Accrual (MA) basis

Economic resources and the full accrual basis

Distinction between the MA basis and full accrual basis of accounting

Distinction between exchange and non-exchange transactions

Main types of non-exchange transactions

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Measurement Focus and Basis of Accounting

Entity’s measurement focus: What is being reported upon?

Basis of Accounting: When transactions and other events are recognized?

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Measurement Focus: flow of current financial resources (focus is on expendable financial resources)--Revenues must be available to pay liabilities of current period before they can be recognized. --Current financial resources include cash, receivables, marketable securities, prepaid items, and supplies inventories--Capital assets such as land, buildings, and

equipment are NOT accounted for in governmental funds, but rather in governmental activities

Basis: modified accrual accounting

Governmental Funds

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Revenue Recognition GAAP for revenue recognition is GASB Stmt. No. 33 Under modified accrual basis, revenue cannot be

recognized until they are both measurable and available to finance expenditures of fiscal period.

Collection of cash must be reasonably assured before revenues can be recognized.

“Available”: 60 day rule has become the benchmark. But some governments have also established 30, 90 days or 1 year time periods.

Two broad types of Transactions1) Non-exchange Transactions2) Exchange Transactions

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Classification of Revenues and Estimated Revenues

GASB Suggestion: 1st classify by fund 2nd classify by source

FUND

SOURCE

Sources include (but are not limited to): Taxes (Ad-valorem and self-assessing)

Special Assessments Licenses and Permits Charges for Services Fines and Forfeits Grants Intergovernmental Revenue

--On-Behalf Payments Donations Miscellaneous Revenues

--Sale of Capital Assets--Investments

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1) Non-exchange Transactions External events in which a government

gives/receives value without directly receiving/giving equal value in exchange

Revenue recognition depends on time requirements - the period in which the resources are required (or may be) used

Some nonexchange transactions may be delayed until program eligibility requirements are met.

Purpose restrictions reported as restricted net assets or reserved fund balance

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Two Types of Limitations on Non-exchange Transaction Revenue

Time Requirements. These specify the period in which resources must be used

or when use must begin (e.g. property

taxes; certain grants). Purpose restrictions (eligibility

requirements). These specify the purpose for which the resources must be used (e.g. dedicated taxes; restricted grants).

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Non-exchange TransactionsFour Categories of Nonexchange Transactions

A) Derived tax revenues B) Imposed nonexchange transactions C) Government-mandated nonexchange

transactions D) Voluntary nonexchange transactions

Standards for the last 2 transactions apply to both revenues and expenditures.

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(A) Derived Tax Revenues These are derived (i.e. result) from assessments on transactions carried on by

taxpayers (e.g. sales taxes-

derived from sales transactions, and income and other

taxes on earnings or assets-derived from various commercial transactions.

Recognition Standards: These should be recognized as revenue when the underlying exchange transaction takes place. Example: Sales taxes should be recognized in the period of the underlying sale.

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(B)Imposed Non-exchange Revenues These are assessments imposed on individuals

and business entities. The most prominent of these are property

taxes and fines. Property tax: It is the bread and butter of local governments.

-Classified as Ad-Valorem taxes (based on value), property taxes are most typically levied against real property.

-Special Assessment – Special kind of Property Tax

Other types include:Fines & Forfeits

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Recognition StandardsImposed Nonexchange Transactions

These should be recognized as revenue in the period in which the government has an enforceable legal claim to the resources and the relevant time requirements have been met.

Ad valorem taxes are those that are paid according to the value of underlying property– (e.g. personal and real property taxes.)

Property taxes would normally be recognized as revenue during the period for which they were levied.

Revenue is recognized ONLY if cash is expected to be collected within 60 days of year end. (i.e. available)

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Viewed as a residual source of revenues in an amount equal to the total revenue needs, less the sum of the beginning of year fund balance and revenues expected to be realized from all other sources

The gross tax levy is calculated as the amount of revenue required from property taxes divided by the estimated collectible portion of the levy (e.g., .96)

Property Taxes

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Accounting for Property Tax Revenue The tax levy is the amount billed to taxpayers. The tax rate is the measure that is actually set by legislative

action, once the required size of the levy is determined. Required tax rate (per $100 or per $1,000 of assessed valuation) =

tax levy

assessed valuation

Calculation:

-Statutory or legislatively approved tax rate *

- assessed valuation of taxable property (either real property or personal property)

Another calculation:

Revenues required

Estimated collectible proportion

Property Taxes (cont’d)

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Special kind of Derived Property Tax. Levied against certain properties

deemed to receive a particular benefit that not all taxpayers receive.

Examples may be street repair, street cleaning, or snow plowing for taxpayers who live outside the normal service area.

Special Assessment Taxes

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Fines are amounts assessed by the courts against those guilty of statutory offenses and neglect of official duties.

Forfeits arise from deposits or bonds made by contractors, accused felons, and others to assure performance on contracts or appearance in court.

Accrue if the amount is known prior to the receipt of cash, which usually is not the caseRefer to the example on pg. 141.

Fines and Forfeits

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(C) Government-mandated Transactions

These occur when a government at one level (e.g. the federal or a state government) provides resources to a government at another level (e.g. a local government or school district).

Requires the recipient to accept and use the resources for a specific purpose.

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Recognition StandardsGovernment Mandated Transactions

Revenue from these transactions should be recognized when all eligibility requirements, including time requirements have been met.

Example: Mandatory drug and alcohol abuse prevention program for the schools (The DARE program in public schools).

If the grant is a reimbursement grant, then recognize when qualifying expenditures have been made by the recipient organization.

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(D) Voluntary Non-exchange transactions

These result from legislative or contractual agreements entered into willingly by two or more parties.

They include certain types of grants given by one government to another and contributions from individuals (e.g. gift to public universities).

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Recognition Standards

Voluntary Nonexchange TransactionsRevenue from these transactions should be recognized

when all eligibility requirements between two willing parties, including time requirements have been met.

Example: State reimbursement to schools for portion of special education costs incurred.

Reimbursement grant when qualifying expenditures have been made.

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May be either government-mandated nonexchange transaction or voluntary nonexchange transaction

Intergovernmental Revenue Include: Pass-through grants On-behalf payments Restricted grant Unrestricted grant Contingent grant Entitlements Shared Revenues Payment in lieu of taxes

Often the amount is known before the actual receipt of cash and thus may be accrued under the modified accrual basis.

Example of journal entries can be found on pgs 149-151.

Intergovernmental Revenue

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Pass -Through Grants Grants a government must transfer to, or spend

on behalf of, a secondary recipient.

GASB stated that as a general rule ‘cash pass-through’ grants should be recognized as (intergovernmental) revenue and expenditures/expenses in governmental, proprietary or trust funds of the primary government and in the government–wide financial stmts.

If government acts as a cash conduit-i.e., merely transmits money without having any administrative involvement-then these grants are reported in agency funds.

Example: State govt. receives the grant from the Fed. govt. to support special education programs.

Example: Food stamps.

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On-Behalf PaymentsWhen one government makes payment for

employment fringe benefits ‘on behalf’ of another government’s employees, the employer government is required to disclose in the notes to its financial statements the related amounts.

You can also refer to the complete example and journal entries on pg. 155.

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2) Exchange Transactions

Transactions in which each party

receives value essentially equal to the value givene.g. one party sells goods or services and the other

buys

Recognize the revenue when it is earned, and the expense/expenditure when it is incurred.

Exchange-like transactions are those in which the values exchanged may be related but not quite equal.

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Exchange vs. Non-exchange Transactions In exchange transactions,

a government provides goods or services to the provider in return for resources received.

Examples Include:License and PermitsCharges for Services

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Primary concern: Should the revenue be recognized when the license is issued and cash received or should it be spread out over the period covered by the license?

Characteristics of licenses: Exchange transactions: License fees which cover the cost

of services provided. Non-exchange transactions: License fees that bear little

relation to the cost of services provided and imposed mainly as a source of general revenues.

License fees are generally non-refundable. Includes items such as vehicle licenses, business

licenses, liquor licenses, marriage licenses, animal licenses, building permits, zoning variances, etc.

Fees for licenses and permits, passenger facility charges, certain tap fees and certain developer contributions should be considered exchange rather than nonexchange transactions, even though the party making the payment may receive less in value than it surrendered.

Licenses and Permits

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Many governments have shifted much of their revenues from taxes on all taxpayers to charges to recipients of services, including charges for recreational services, building inspections, etc.

Accrue if the amount is known prior to the receipt of cash

Charges for services

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Revenues that do not fall into one of the other categories.

Examples: Proceeds from the sale of government assets Investment income

In general accrue if the amount is known prior to the receipt of cash; but usually accounted for when collected in cash.

Miscellaneous Revenues

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Sales of Capital Assets When a capital asset is sold, financial

resources received are accounted for in a governmental fund, but the assets that are sold are NOT.

This concept is reinforced by the journal entry on page 156.

Remember that under Govt.-wide model, the sale of capital assets is recorded under the full accrual basis of accounting.

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Investment Gains and Losses Until 1993 both GASB and FASB required that short-term

investments be reported at either historical cost or lower of historical or market value.

FASB broke the tradition later on and required business investment portfolio to be classified as:-Trading Securities – fair value-Held to maturities-Available for sale – fair value

But for non-profits, FASB required that all debt and equity securities be stated at fair value.

Gains and losses on investments must be recognized and reported in the statement of activities.

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Summary Primary objectives of financial reporting:

-Interperiod equity and budgetary compliance. 2 types of financial statements are prepared:

-Fund and Government-wide GASB Std. #33 provides guidance for revenue recognition

and is applicable to statements prepared on either the full accrual or the modified accrual basis.

GASB Std. # 33 sets forth revenue recognition guidelines for:-Imposed nonexchange transactions, ex. property taxes-Derived exchange transactions, ex. Sales taxes-Grants-Other exchange transactions, ex. sale of capital assets-Investments etc.