Revenue Accounting: Governmental Funds

1
Revenue AccountingGovernmental Funds

• Chapter 5

2
Learning Objectives

• Determine when to recognize and report various
  revenues
• Identify categories of nonexchange revenues and
  when to recognize assets and revenues
• Understand accounting for levy, collection, and
  enforcement of property taxes and other tax
  revenues
• Account for investment income
• Distinguish and account for intergovernmental
  revenues
• Understand classification and accounting for
  other types of revenues
• Account for and report revenue budget revisions,
  changes in principles, and revenue-related error
  corrections restatements

3
Revenues in governmental funds

• Result in a corresponding increase in net assets
  of governmental entity as a whole
• Result from exchange-like interfund services
  provided

4
Nonexchange Transactions

• Governed by GASBS 33
• 4 classifications of transactions
• May have significant deferred revenues due to
  timing of recognizing asset and revenue from
  transaction
• Revenues recognition requires entity to meet both
• Asset recognition criteria or received cash
• Revenue recognition criteria

x
5
Modified Accrual Revenue Recognition

• Recognize only revenues susceptible to accrual
  others on a cash basis
• Requirements for susceptible to accrual
• Objectively measurable
• Legally available (usable) to finance current
  period expenditures
• Comparison of accrual and modified accrual

x
6
Establishing legal claim to revenues

• Taxes levy establishes claims to resources
• Charges for services performing the service
• Sales taxes business making a taxable sale
• Income taxes taxpayer earning taxable wages

7
Recommended Classes of Revenues

• Taxes
• Licenses permits
• Intergovernmental revenues
• Charges for services
• Fines and forfeits
• Miscellaneous

8
Types of Tax Revenues

• Taxpayer assessed
• Income taxes
• Sales taxes
• Levied property taxes

9
Taxpayer assessed taxes

• Must assure that tax base has been accurately
  reported by taxpayer may be very difficult to
  do
• Should be recognized when susceptible to accrual
• When underlying transaction takes place
• In practice, usually recognized when collected
• Revenue from tax stamps usually recognized when
  stamps are sold

10
Administering property taxes

• Tax assessor determines assessed value of
  property
• Local assessment review board hears complaints
  about assessments
• Boards of equalization assign values to taxing
  districts
• Legislative body levies amount of tax needed to
  cover expenditures
• Tax levy distributed among taxpayers based on
  assessed value
• Taxpayers are billed
• Tax collections are credited to taxpayers
  accounts
• Collects enforced by penalties, interest, sale
  of property for taxes

11
1. Assessment of Property

• Valuing property for tax purposes
• Properties of other governments religious
  organizations exempt from tax
• Several governments may tax same property
  overlapping jurisdictions

12
2. Review of Assessment

• Performed by local board
• May adjust individual assessments
• Taxpayers can still appeal in courts

13
3. Equalization of Assessments

• Assessments made by a number of different
  assessors
• Equalization board attempts to make sure multiple
  properties are taxed at the same percentage of
  fair value

14
4. Levying the Tax

• Levy made through ordinance
• Levies may vary in level of restrictions as to
  use or purpose of tax
• Determining tax rate divide levy by total
  assessed valuation resulting percentage is rate
  or mills per dollar

15
5. Distribution of Levy to Taxpayers

• Amount due from each taxpayer is determined by
  multiplying rate times assessed value of property

16
6. Taxpayers are billed

• Amount owed by each taxpayer entered into Tax
  Roll
• Taxes recorded in the accounts
• Receivable is for gross levy
• Adjustments made for
• Allowance for uncollectible accounts
• Discounts on taxes

17
7. Recording Tax Collections

• Must keep track of which years taxes were
  collected current and delinquent
• Taxes may be levied but not available
• Levied for next years operations
• Will not be collected in time to be available
• Taxes collected in advance reported as deferred
  revenue at time of collection

18
8. Enforcing Tax Collections

• Interest and penalties assessed for late
  payment of taxes subject to availability
  requirement
• Tax sales
• Lien receivable created from taxes receivable,
  interest and penalties, court costs
• Allowances also converted
• Sale price gt than receivable difference goes to
  taxpayer
• Sale price lt than receivable charge allowance
  account

19
Licenses and Permits

• Categories
• Business alcoholic beverages, health,
  corporations, utilities, professional,
  occupational, and amusements
• Nonbusiness building, vehicles, driver
  licenses, hunting fishing, marriage, burial,
  animal
• Rates established by ordinance and adjusted
  periodically

20
Intergovernmental Revenues

• Government-mandated nonexchange transactions
• Voluntary nonexchange transactions

21
Government-mandated Nonexchange Transactions

• Government at one level
• Provides resources to government at another
  level, and
• Requires recipient to use them for a specific
  purpose
• Provider government establishes purpose
  restrictions and may set time requirements and
  other eligibility requirements

22
Voluntary Nonexchange Transactions

• Legislative or contractual agreements between two
  or more willing parties
• Examples grants, certain entitlements, and
  donations
• Parties not limited to governments but includes
  individuals
• Provider may establish purpose restrictions and
  eligibility requirements and may require return
  of resources if requirements not met

23
Types of Grants

• Capital Grants
• Solely for capital purposes
• Examples
• Airport improvements
• Buses
• Subway systems
• Wastewater treatment plants

• Operating Grants
• All other grants
• Example operation of social welfare programs

24
Entitlements Shared Revenues

• Entitlements portions of appropriations
  allocated among governments based on relative
  populations (or some other measure)

• Shared revenues varies in amount in each period
  (depending on collections) and allocated based on
  some formula or underlying transaction

25
Intergovernmental Revenue Accounting (IGR) Issues

• Fund Identification
• Pass-Through Grants
• Revenue Recognition

26
Fund Identification

• Not always necessary to establish a separate fund
  for grants
• Use GF whenever possible
• Use SRF only if legally mandated
• Resources for debt principal/interest payment
  should be in DSF
• Use CPF for grants restricted for capital
  acquisition/construction
• Grants for EFs or ISFs should be accounted for in
  those funds

27
Pass-Through Grants

• Primary recipient (entity that first receives the
  money) uses grant to support some other program
• Primary recipient must pass grant along to
  intended user (subrecipient) cannot use for own
  purposes
• Subrecipient uses grant for intended purpose or
  passes along to sub-subrecipient

28
Pass-Through Grants

• Primary recipient generally accounts for grant as
  revenue and expenditure
• Primary recipient may use Agency Fund only if it
  acts as cash conduit no administrative or
  financial involvement with grant

29
Revenue Recognition

• Unrestricted IGR recognized as revenues
  immediately, if available
• Restricted IGR not recognized until all
  eligibility requirements are met generally must
  be expended for allowable costs to meet
  requirements known as expenditure-driven grant

30
IGR recognition

• If grant received before earned, recognize asset
  (Cash), but defer revenue until earned
• If grant earned before received, recognize asset
  (receivable) and revenue, if considered available

31
Charges for Services

• Result from goods and services provided to
  public, other departments or other governments
• When dealing with other departments, must
  distinguish between reimbursements and interfund
  service transactions
• Recognize revenue when service is provided
  (earned), if available

32
Special Assessments

• Service provided in one year, collection made in
  subsequent years
• Expenditures recognized for service
• Revenue deferred until collection

33
Special Assessments
34
Special Assessments
35
Fines Forfeits

• Usually not that big of a source of revenue
• Revenue usually recognized on a cash basis
• Large fines might be accrued

36
Miscellaneous Revenues

• Investment earnings
• Capital assets sales / losses
• PILOTs
• Escheats
• Private contributions

37
Investment Earnings

• Most complicated issue in this section
• Rules changed dramatically with GASBS 31 some
  things actually made easier
• GASBS 31 did for investments what FASBS 115 did
  in the private sector only the GASB rules are
  much easier
• GASBS 31 identified types of investments to
  adjust to fair value

x
38
Essential Elements of Fair Value Accounting for
Investments

• Investments are carried at fair value
• Premiums discounts on investments need not be
  amortized, unless using amortized cost
• Fair value accounting not used for investments
  accounted for using equity method

39
Reporting Interest Income and Changes in Fair
Value

• Investment income cash interest and dividends
  received or accrued realized gains (losses)
  changes in fair value of investments
• Investment income may be reported on single line
  or broken into components
• Interest and dividends
• Net increase (decrease) in fair value of
  investments wording required by GASB
• Realized unrealized gains losses should not
  be reported separately in statements but may be
  disclosed in the notes

40
Capital Asset Sales/Losses

• Gains losses on sales of capital assets not
  reported in governmental fund statements would
  violate MFBA
• Net proceeds from sales reported as an Other
  Financing Source

41
Payments in Lieu of Tax (PILOTs)

• Payment from one government to another because
  payor does not pay taxes
• Federal government major payor
• Payments within governments funds
• May qualify as PILOT if payor receives something
  in return otherwise it is a transfer
• Probably should be called interfund service
  transaction

42
Escheats

• State law indicates when property of people dying
  intestate, inactive checking other accounts, or
  other property must pass to the state
• Property so received is a revenue to the state
• Capital assets should be recorded in General
  Capital Assets at fair value

43
Private Contributions

• Rare, but it does occur
• Unrestricted donations are revenue in the General
  Fund
• Restricted donations
• For the benefit of the government are revenues in
  SRF, CPF or Permanent Fund
• For the benefit of others are revenues in a
  Private Purpose Trust Fund
• Property received via contributions is recorded
  at fair value

44
Revenue Budget Revisions

• Invariably causes changes in Unreserved Fund
  Balance
• Note entry on page 200 why is it necessary?
• Important effect is not in the General Ledger but
  in the Subsidiary Ledger need General Ledger
  entry for audit trail purposes.

45
Changes in Accounting Principles

• Two types
• Prospective affects only current and subsequent
  years
• Retroactive requires restatement of prior years
  or computation of cumulative effect

46
Common Causes of Changes

• Management decides to change from one acceptable
  method of accounting to another acceptable method
  (not common)
• Change in circumstances (state) requires change
  in method of applying acceptable principle
• GASB issues new standard that requires change in
  revenue recognition

47
Standard Practices

• Change is effective at beginning of the year of
  the change
• Cumulative effect if any is reported as a
  restatement of beginning fund balance
• Revenues reported under new policy for each year
  presented
• Change is disclosed and explained in the notes to
  the financial statements

48
Error Correction

• 3 step process
• Recognize the erroneous entry that was recorded
• Determine what the correct entry should be
• Fix the error by essentially combining steps 1 2

49
Error Correction Issues

• If error is caught in same year, fairly simple
  process to reverse it and record correction
• If error was made in a previous year, must
  consider if accounts affected have been closed
  may result in a Correction of Prior Year Error

50
Error Correction Example 1

• Identify the error government accountant
  incorrectly calculated interest to be accrued
  amount recorded was 75 it should have been 100.

51
Error Correction Example 2

• Correct entry is fairly straight-forward

52
Error Correction Example 3