Chapter 4 Recognizing Revenues in Governmental Funds

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Learning Objectives
Why governments focus on current financial resources and use the MA basis? Why governments focus on all economic resources and use the full accrual basis? The key distinctions between the modified accrual and full accrual bases of accounting The distinction between exchange and nonexchange transactions The main types of non-exchange transactions
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Financial Statements
Two types of financial statements: Fund: Modified accrual basis Government-wide: Full accrual basis

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Modified Accrual Basis

Objectives: Provide information relating to Inter-period equity Demonstrate budgetary compliance

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Measurement Focus and Basis of Accounting

Entitys measurement focus: What is being reported upon? Basis of Accounting: When transactions and other events are recognized?

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Governmental Funds
Revenues must be available to pay liabilities of current period before they can be recognized. Measurement Focus: flow of current financial resources
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

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Government-wide Statement of Activities

Expenses should be reported by function or program.
Direct expenses - those related to a specific function or program Indirect expenses - those that can not be directly linked to an identifiable function or program.

Revenues should be distinguished between

Program revenues - reported in the program/functions section of the statement General revenues - not directly linked to any program/function and reported in a separate section. See Table 2-4 on page 43.

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Government-wide Statement of Activities

Program revenues: are reported in 3 columns -Charges for services -Program specified operating grants or contribution -Program specified capital grants. General revenues: all revenues other than program revenues.
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Exchange Transactions
Transactions 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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Nonexchange 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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Nonexchange Transactions
Four Categories of Nonexchange Transactions Derived tax revenues Imposed nonexchange transactions Government-mandated nonexchange transactions Voluntary nonexchange transactions

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

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Derived Tax Revenues

These are derived (i.e. result) from assessments on exchange transactions carried on by taxpayers. They include sales taxes (derived from sales transactions), and income and other taxes on earnings or assets (derived from various commercial transactions).

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Imposed Nonexchange Transactions

These are assessments imposed on individuals and business entities. The most prominent of these are property taxes and fines.

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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 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 grants given by one government to another and contributions from individuals (e.g. gift to public universities).

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Two Types of Limitations

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

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Revenue Recognition
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.
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Revenue Recognition
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. Revenue is recognized ONLY if cash is expected to be collected within 60 days of year end. Other revenues: 60 day rule has becomes the benchmark. But some governments have also established 30, 90 days or 1 year time periods.
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Recognition Standards
Derived Tax Revenues 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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Recognition Standards
Imposed 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. Property taxes would normally be recognized as revenue during the period for which they were levied.
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Recognition Standards
Government Mandated and Voluntary Nonexchange Transactions

Revenue from these transactions should be recognized when all eligibility requirements, including time requirements have been met. Example: Reimbursement grant when qualifying expenditures have been made.

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Exchange vs. Nonexchange Transactions

In exchange transactions, a government provides goods or services to the provider in return for resources received.

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Exchange vs. Nonexchange Transactions

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.

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Application
Applies to both revenues and expenditures. Thus payments from one government to another are expected to be accounted for symmetrically. Applies to financial statements prepared on both the modified accrual and the full accrual basis; thus both fund and government-wide statements.
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Classification of Revenues and Estimated Revenues

By Fund By Source

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Taxes (Ad-valorem and self-assessing) Special Assessments Licenses and Permits Intergovernmental Revenues Charges for Services Fines and Forfeits Miscellaneous Revenues
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Revenues - Taxes (Ad valorem and Self-assessing)

Ad valorem taxes are those that are paid according to the value of underlying property--e. g. personal and real property taxes. Self-assessing taxes are those that are based on income or sales, and thus are not measurable until income or sales for a period are known. Ordinarily not accrued until the amount becomes known.
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Revenues - Property Taxes (contd)

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)
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Accounting for Property Tax Revenue

The tax levy is the amount billed to taxpayers. 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

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Accounting for Property Tax Revenue (contd)

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

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Accounting for Property Tax Revenue (contd)

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.

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Accounting for Property Tax Revenue: (contd)

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. Taxes Receivable-Current $1,000,000 Est. Uncollectible Current Taxes Revenues Cr. 10,000 990,000

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Revenues - Special Assessment Taxes

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.

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Revenues - Charges for services

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

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Revenues - Fines and Forfeits

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 case
Refer to the example on pg. 135.
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Revenues - Miscellaneous
Revenues that do not fall into one of the other categories. Examples: proceeds from the sale of government assets investment income accrue if the amount is known prior to the receipt of cash; but usually accounted for when collected in cash.
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Revenues - Intergovernmental revenue

Includes grants, entitlements, and shared revenues (What are the differences among these categories?) Often the amount is known before the actual receipt of cash and thus may be accrued under the modified accrual basis.

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Revenues-Intergovernmental Revenues and Grants

Restricted grant Unrestricted Contingent Entitlements Shared Revenues Payment of lieu of taxes

Example of journal entries can be found on pgs 142144.

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Revenues - Licenses and permits

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.
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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-thru grants should be recognized as revenues and expenditures/expenses in governmental, proprietary or trust funds. If government acts as a cash conduit-i.e., merely transmits money without having an administrative involvement-then these grants are reported in agency funds. Ex. Food stamps.
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On-Behalf Payments
One government makes payment for employment fringe benefits on behalf of another.

You can also refer to the complete example and journal entries on pg. 147.

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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 149. 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

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Investment Gains and Losses (cont)

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.
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