chapter 4c.ymcdn.com/sites/ · pdf file•gaap for revenue recognition is gasb stmt. no. 33...
Post on 15-Mar-2018
219 Views
Preview:
TRANSCRIPT
3/7/2016
1
Granof, et al. – 7th edition Chapter 4 |
Chapter 4Recognizing Revenues in Governmental Funds
© 2016 John Wiley & Sons, Inc. All rights reserved. 1
Granof, et al. – 7th edition Chapter 4 |
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
© 2016 John Wiley & Sons, Inc. All rights reserved. 2
3/7/2016
2
Granof, et al. – 7th edition Chapter 4 |
Learning Objectives• Why focus on current financial resources and the modified
accrual basis for governmental funds
• Why focus on economic resources and the full accrual basis for government-wide financial statements
• Distinction between the modified accrual and full accrual basis of accounting
• Differentiate between exchange and non-exchange transactions
• Main types of non-exchange transactions
© 2016 John Wiley & Sons, Inc. All rights reserved. 3
Granof, et al. – 7th edition Chapter 4 |
Measurement Focus and Basis of Accounting
•Entity’s measurement focus• What is being reported upon?
• Which assets, liabilities, and deferrals are being measured?
•Basis of Accounting• When transactions and other events are recognized?
© 2016 John Wiley & Sons, Inc. All rights reserved. 4
3/7/2016
3
Granof, et al. – 7th edition Chapter 4 |
Governmental Funds•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
© 2016 John Wiley & Sons, Inc. All rights reserved. 5
Granof, et al. – 7th edition Chapter 4 |
FUND STATEMENTS VS. GOVERNMENT-WIDE STATEMENTS
Effect of GASB #34
© 2016 John Wiley & Sons, Inc. All rights reserved. 6
3/7/2016
4
Granof, et al. – 7th edition Chapter 4 |© 2016 John Wiley & Sons, Inc. All rights reserved. 7
Granof, et al. – 7th edition Chapter 4 |© 2016 John Wiley & Sons, Inc. All rights reserved. 8
3/7/2016
5
Granof, et al. – 7th edition Chapter 4 |© 2016 John Wiley & Sons, Inc. All rights reserved. 9
Granof, et al. – 7th edition Chapter 4 |
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 Transactions
• Non-exchange Transactions
• Exchange Transactions
© 2016 John Wiley & Sons, Inc. All rights reserved. 10
3/7/2016
6
Granof, et al. – 7th edition Chapter 4 |
Example of Revenue Recognition in CAFRThe following note on revenues in the basic financial statements of the City of Louisville, Ohio illustrates the city’s implementation of GASB Statement No. 33.
Revenues - Exchange and Non-exchange Transactions- City of Louisville, Ohio
Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the City, “available” means expected to be received within sixty days of year-end.
© 2016 John Wiley & Sons, Inc. All rights reserved. 11
Granof, et al. – 7th edition Chapter 4 |
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 non-exchange transactions may be delayed until program eligibility requirements are met.
•Purpose restrictions reported as restricted net assets or reserved fund balance
© 2016 John Wiley & Sons, Inc. All rights reserved. 12
3/7/2016
7
Granof, et al. – 7th edition Chapter 4 |
Four Nonexchange Transactions
© 2016 John Wiley & Sons, Inc. All rights reserved. 13
Standards for the last 2
transactions apply to both
revenues and expenditures.
Derived tax revenues
Imposed non-exchange revenues
Government-mandated non-
exchange transactions
Voluntary non-exchange
transactions
Granof, et al. – 7th edition Chapter 4 |
Derived Tax Revenues•These are derived from assessments on exchange transactions carried on by taxpayers.
• Include sales taxes and income and other taxes on earnings or assets
•Recognized as revenue when the underlying exchange transaction takes place.• Example: Sales taxes should be recognized in the period of the underlying sale.
© 2016 John Wiley & Sons, Inc. All rights reserved. 14
3/7/2016
8
Granof, et al. – 7th edition Chapter 4 |
Imposed Nonexchange RevenuesAssessments 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
Recognized in the year for which they are levied
© 2016 John Wiley & Sons, Inc. All rights reserved. 15
Granof, et al. – 7th edition Chapter 4 |
Government-mandated Nonexchange 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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 16
3/7/2016
9
Granof, et al. – 7th edition Chapter 4 |
Voluntary Nonexchange 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).
•Similar to government-mandated nonexchange transactions but the recipient government is not required to accept the award.
© 2016 John Wiley & Sons, Inc. All rights reserved. 17
Granof, et al. – 7th edition Chapter 4 |
Two Types of Limitations on Nonexchange Transaction RevenueTime 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).
© 2016 John Wiley & Sons, Inc. All rights reserved. 18
3/7/2016
10
Granof, et al. – 7th edition Chapter 4 |
Property Taxes•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
© 2016 John Wiley & Sons, Inc. All rights reserved. 19
Granof, et al. – 7th edition Chapter 4 |
Property Taxes (cont’d)
© 2016 John Wiley & Sons, Inc. All rights reserved. 20
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)
Calculation:
Statutory or legislatively * assessed valuation of taxable
approved tax rate property (either real property or
personal property)
Another calculation:
Revenues required
Estimated collectible proportion
= tax levy
assessed valuation
3/7/2016
11
Granof, et al. – 7th edition Chapter 4 |
Property Taxes (cont’d)Assessed valuation is determined by an elected “Tax Assessor”
Calculation:
Estimated True Value * Assessment Ratio
In some jurisdictions the assessment ratio is 1.00 (i.e., full estimated market value), other jurisdictions it might be .30 or some other fraction of full value.
© 2016 John Wiley & Sons, Inc. All rights reserved. 21
Granof, et al. – 7th edition Chapter 4 |
Property Taxes (cont’d)Assume Revenues of $990,000 are required and it is estimated that 1% will be uncollectible:
Levy = $990,000/.99 = $1,000,000.
(ignore subsidiary ledger entry)
GF General Journal Dr. Cr.
Taxes Receivable-Current $1,000,000
Est. Uncollectible Current Taxes 10,000
Revenues 990,000
© 2016 John Wiley & Sons, Inc. All rights reserved. 22
3/7/2016
12
Granof, et al. – 7th edition Chapter 4 |
Special Assessment TaxesSpecial 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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 23
Granof, et al. – 7th edition Chapter 4 |
Fines and ForfeitsFines 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 case
Refer to the example on pg. 157-158
© 2016 John Wiley & Sons, Inc. All rights reserved. 24
3/7/2016
13
Granof, et al. – 7th edition Chapter 4 |
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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 25
Granof, et al. – 7th edition Chapter 4 |
Recognition StandardsVoluntary Non-exchange Transactions
Revenue 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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 26
3/7/2016
14
Granof, et al. – 7th edition Chapter 4 |
Intergovernmental Revenue•May be either government-mandated non-exchange transaction or voluntary non-exchange transaction
•Intergovernmental Revenue Include:
• 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 164-166
© 2016 John Wiley & Sons, Inc. All rights reserved. 27
Granof, et al. – 7th edition Chapter 4 |
Pass -Through GrantsGrants 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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 28
3/7/2016
15
Granof, et al. – 7th edition Chapter 4 |
On-Behalf PaymentsOne government makes payment for employment fringe benefits ‘on behalf’ of another.
You can also refer to the complete example and journal entries on pg. 169
© 2016 John Wiley & Sons, Inc. All rights reserved. 29
Granof, et al. – 7th edition Chapter 4 |
Exchange TransactionsTransactions in which each party receives value essentially equal to the value given
e.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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 30
3/7/2016
16
Granof, et al. – 7th edition Chapter 4 |
Exchange vs NonexchangeTransactionsIn exchange transactions, a government provides goods or services to the provider in return for resources received.
For example: license and permits, charges for services
In nonexchange transactions, a government gives/receives value without directly receiving/giving equal value in exchange
© 2016 John Wiley & Sons, Inc. All rights reserved. 31
Granof, et al. – 7th edition Chapter 4 |
Licenses and permitsPrimary 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 nonexchangetransactions, even though the party making the payment may receive less in value than it surrendered.
© 2016 John Wiley & Sons, Inc. All rights reserved. 32
3/7/2016
17
Granof, et al. – 7th edition Chapter 4 |
Charges for servicesMany 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
© 2016 John Wiley & Sons, Inc. All rights reserved. 33
Granof, et al. – 7th edition Chapter 4 |
Miscellaneous RevenuesRevenues 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.
© 2016 John Wiley & Sons, Inc. All rights reserved. 34
3/7/2016
18
Granof, et al. – 7th edition Chapter 4 |
Sales of Capital AssetsWhen 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 170.
Remember that under Govt. wide model, the sale of capital assets is recorded under the full accrual basis of accounting.
© 2016 John Wiley & Sons, Inc. All rights reserved. 35
Granof, et al. – 7th edition Chapter 4 |© 2016 John Wiley & Sons, Inc. All rights reserved. 36
3/7/2016
19
Granof, et al. – 7th edition Chapter 4 |
SummaryPrimary 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 revenue, ex. property taxes
Derived tax revenue, ex. sales taxes
Government-mandated nonexchange transactions
Voluntary nonexchange transactions
Grants
Other exchange transactions, ex. sale of capital assets
Investments etc.
© 2016 John Wiley & Sons, Inc. All rights reserved. 37
top related