chapter 4c.ymcdn.com/sites/ · pdf file•gaap for revenue recognition is gasb stmt. no. 33...

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Granof, et al. – 7th edition Chapter 4 |

Chapter 4Recognizing Revenues in Governmental Funds

© 2016 John Wiley & Sons, Inc. All rights reserved. 1


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• 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



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?


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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



FUND STATEMENTS VS. GOVERNMENT-WIDE STATEMENTS

Effect of GASB #34


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Granof, et al. – 7th edition Chapter 4 |© 2016 John Wiley & Sons, Inc. All rights reserved. 7


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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 Transactions

• Non-exchange Transactions

• Exchange Transactions


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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.



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


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Four Nonexchange Transactions


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


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.


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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



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.


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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.



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).


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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



Property Taxes (cont’d)


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

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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.



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


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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.



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


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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.



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.


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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



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.


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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



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.


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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



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.


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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



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.


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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.



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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.


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