Governmental Activities Revenue Recognition: Chapter 4

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Governmental Activities-- Revenue Recognition
Chapter 4

• At the end of the chapter you should be able to
• Explain the different MFBAs of the fund and
  government-wide financial statements
• Distinguish between exchange and nonexchange
  transactions
• Apply the revenue recognition criteria to the
  various nonexchange transactions experienced by
  state and local governments

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Review Governmental Funds MFBA

• Measurement Focus flow of current financial
  resources versus economic resources
• Basis of Accounting modified accrual versus full
  accrual
• Why? To help demonstrate whether the entity
  obtained and used its resources in accordance
  with its legally adopted budget
• Providing information about interperiod equity is
  the job of the full accrual government-wide
  financial statements

3
Modified AccrualRevenue Recognition

• Governmental funds use modified accrual
  accounting
• Revenues are recognized when both
• measurable
• available

4
GASB 33

• Revenue recognition guidance for nonexchange
  revenues
• Imposed nonexchange revenues
• Derived tax revenues
• Government-mandated nonexchange revenues
• Voluntary nonexchange revenues
• Time requirements are eligibility criteria
• Purpose restrictions are constraints on use

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Property Taxes (ad valorem)

• Record gross amount of levy as receivable
• Estimate uncollectible amounts and deduct from
  revenue to recognize net amount
• Defer any revenue that is not available
• Example
• April 1, City levies ad valorem tax of 20,000
  for the current fiscal year
• 5 estimate of uncollectibility
• Half due June 1, remainder due Sept 15
• Fiscal year-end is June 30

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Property Tax Journal Entries

• Record levy in General Fund on 4/1
• Record levy at GW on 4/1

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Collection of Taxes

• April collections in GF
• September collections in GF

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Delinquencies and Write-Offs

• Delinquent taxes should be moved to another
  receivable account on the substantive due date.
• Direct write-off method is not GAAP

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Other Imposed Nonexchange Revenues

• Fines, penalties, etc
• Recognize asset if you have an enforceable legal
  claim
• In the funds, recognize revenue if you have an
  enforceable legal claim AND the revenue is
  measurable and available
• What if the fine can be contested?

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Fines Imposed Nonexchange Revenue

• Enforceable legal claim
• Must be protested by a specific date
• If protested, the claim is not established and
  the receivable should NOT be recognized
• Measurable
• Historical experience is reliable for estimating
  uncollectible amounts
• Available
• Amounts that will not be collected within a
  reasonable time after fiscal year end should be
  deferred

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Derived Taxes

• Recognize assets when the underlying transaction
  occurs
• In the governmental funds, recognize revenues at
  the same time unless collection will be delayed
  too long beyond fiscal year end to be considered
  available

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Grants and Other

• Sources of grants
• Revenue recognition
• Eligibility requirements
• Example Private 100,000 grant awarded on
  9/15/2005 to purchase playground equipment for
  city parks. 90,000 is spent on equipment in
  December

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Grant Example A

• Assume there are no eligibility requirements
• Playground Special Revenue Fund

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Grant Example A contd

• Playground Special Revenue Fund

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Grant Example B

• Assume funds are required to be spent in 2006
• Playground Special Revenue Fund

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Grant Example C

• Assume the grant is reimbursement-based
• Playground Special Revenue Fund
• No journal entries until

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Grant Example D

• Assume the City receives the cash at the time the
  grant is awarded. The funds are to be spent on
  playground equipment if the City can obtain
  matching funds from another source
• Playground Special Revenue Fund

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Grant Example D contd
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Pass-through Grants

• Is there administrative responsibility?
• No? Agency fund
• Yes? Recognize revenue and expenditure/expense in
  the funds
• Food Stamp program

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Sale of Capital Assets

• In a governmental fund
• At the government-wide level

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Investments

• Report at fair value all investments except those
  with short-term maturities
• All changes in fair value are reported on the
  fund operating statement and the government-wide
  Statement of Activities
• Change in fair value Outputs Inputs
• Outputs FV at year-end sales
• Inputs FV at beginning purchases

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Exchange Transactions

• Does a government have exchange transactions?
• How should they be recognized?
• GASB 33 prescribes that even transactions that
  are not pure exchange transactions should be
  accounted as such
• The spirit of GASB 34 would indicate accrual
• However, the GASB also recognizes that
  miscellaneous revenues are often best recognized
  when received
• Inconsistent? Practice is cash basis

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Revenues

• General Fund
• Revenues by source

• Government-wide
• Charges for services
• Program-specific operating grants and
  contributions
• Program-specific capital grants
• General revenues