Chapter 4

Recognizing Revenue in Governmental Funds

Questions for Review and Discussion
1. Basis of accounting refers to when transactions and events are recognized.
Measurement focus refers to what is being reported upon that is, which assets and
liabilities are being measured. Once one is selected, the other is automatically
determined. What is reported upon i.e., measurement focus! establishes when
transactions and events are recognized basis of accounting!. "or e#ample, if net
financial resources are focused upon, then revenues and e#penditures would be
recognized whenever there is an increase or decrease in net financial resources.
$. %er generally accepted practices of today, the measurement focus is on
&determination of financial position and changes in financial position sources, uses,
and balance of financial resources!.' (overnmental funds are accounted for on a
modified accrual basis. "inancial resources include current financial resources
cash, and other items that can be e#pected to be transformed into cash in the normal
course of operations. )he other items include investments and receivables but not
fi#ed assets.
*urrent financial resources and the modified accrual basis of accounting is a
compromise between a measurement focus and basis of accounting that would
measure interperiod e+uity and one that would report upon budgetary compliance.
,nterperiod e+uity can best be reported upon by focusing on all economic resources
and using a full accrual basis of accounting. Budgetary compliance can be reported
on satisfactorily by focusing on the same resources as does the budget of the
individual government. -owever, all governments do not budget on the same basis,
so statements on a budget basis would not be readily comparable.
.. /n e#change transaction is one in which each party gives and receives consideration
of e+ual value. / none#change transaction is one in which one party gives or receives
value without directly receiving or giving e+uivalent value in e#change.
0. )he main categories of revenues per (/1B 1tatement 2o. .. are3
,mposed none#change revenues. )hese are assessments imposed on individuals
and business entities. )he most prominent of these are property ta#es and fines.
4erived ta# revenues. )hese are derived i.e., result! from assessments on
e#change transactions carried on by ta#payers. )hey include sales ta#es derived
from sales transactions!, and income and other ta#es on earnings derived from
various income5producing commercial transactions!.
051
(overnment5mandated none#change transactions. )hese 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! and re+uires the recipient to use the resources for a specific purpose. "or
e#ample, a state may grant funds to a county stipulating that the resources be
used for road improvements.
6oluntary none#change transactions. )hese result from legislative or contractual
agreements entered into willingly by two or more parties. )hey include grants
given by one government to another and contributions from individuals e.g.,
gifts to public universities!. Often the provider imposes eligibility re+uirements or
restrictions as to how the funds may be used. )hese types of transactions are
similar to the government5mandated none#change transactions, but differ in that
the recipient government is not re+uired to accept the funds and the
accompanying re+uirements as to how they may be spent.
7. 8evenues must be measurable and available to finance e#penditures of the current
period. )he none#change revenues of governments are intrinsically associated with
e#penditures9 they are generated solely to meet e#penditures. )herefore it is
reasonable to recognize revenues only to the e#tent that they are available to cover
the e#penditures with which they are associated.
:. %roperty ta#es should be recognized in the period for which the ta#es are levied. ,n
the fund statements, the ta#es must meet the additional criterion that they be
&available.'
;. /s defined by (/1B, a deferred inflow of resources is the acquisition of net assets
by the government that is applicable to a future reporting period.' When a
governmental entity receives property ta#es in the year prior to which they are due
and in which they are intended to be spent then the net assets of the government
increase inasmuch as the cash is received, but are not offset by a decrease in any
other asset or an increase in a liability.
<. 1ales ta#es should be recognized in the period in which the underlying sales
transaction ta=es place. 1ales ta#es are &derived' from an underlying economic event
that event being the sales transaction. -ence it is appropriate to recognize
revenue at the time of the event.
>. )he problems associated with recognizing revenues from income ta#es include3
)he ta# is based on income of either a calendar year or a fiscal year elected by the
ta#payer, but such year might not coincide with the government?s fiscal year9
)a#payers pay their ta#es throughout the year based on estimates. -ence, the
amount collected during a year may be more or less than the amount to which the
government is actually entitled.
05$
Owing to the self5assessment process, ta#es may be collected as the result of
audits many years after the period to which they are applicable.
1@. 8eimbursement grants are payments that are intended to pay for specified
e#penditures. Most typically the grantor reimburses the grantee for all or a portion of
allowable costs. Antitlements, by contrast, are payments, usually from a higher level
government, to which a state or local government is automatically entitled in an
amount determined by a specified formula.
Because e#penditure5driven grants are tied directly to specific e#penditures, they
should be recognized as revenues in the same period as the e#penditures i.e.,
when the grantee satisfies the eligibility re+uirements by incurring the allowable
costs. Antitlements do not typically have any significant eligibility re+uirements.
-ence, they can be recognized as revenue as soon as the funds are available for
e#penditure. )hey may, however, have time re+uirements in that they must be spent
in a specified period. ,f so, recognition should ta=e place in the period or periods
when resources are re+uired to be used or when use may begin.
11. )he city could recognize the revenue as soon as it has made all eligibility
re+uirements in this case none. )herefore, in its government5wide statements it
can recognize revenue upon receipt of the pledge. -owever, in its fund statements,
the donation cannot be recognized as revenue until it is available for e#penditure
i.e., when the cash is received.
1$. %ass5through grants are awards that a government must either transfer to, or spend
on behalf of, a third party recipient. / grant recipient should report a pass5through
grant as both a revenue and an e#penditure as long as the government serves as more
than a cash conduit that is, if it does more than merely transmit grantor5supplied
moneys without having &administrative involvement.' /dministrative involvement
may be indicated either by selecting recipients or monitoring performance.
1.. )he situation described by the student arises because the fi#ed assets are not
recognized as assets in the governmental funds. -ence, the proceeds from the sale of
scrap increases fund assets. ,n the business sector, fi#ed assets, although recognized
on the balance sheet, are not necessarily reported at mar=et values. -ence, if an asset
were destroyed and sold either as scrap or to an insurance company as part of a
settlement! the entity could also report a gain. 2either businesses nor governmental
funds record assets at amounts indicative of their economic values. ,n businesses they
are recorded at historical cost, less depreciation9 in governmental funds they are
recorded at zero. ,n the conte#t of the governmental model, the recognition of the
increase in fund balance ma=es perfect sense.
10. )he arguments would include the following3
"air value is more relevant for most decisions9
,nvestments are held as cash substitutes and can readily be e#changed for cash. ,n
that sense the increases in value are &available9'
05.
"air values are obBective9 price +uotes are readily available for most types of
securities9
)he performance of investment managers, and their employer governments, is
measured by total return dividends, interest, and changes in fair values.
Exercises
EX 4-1
1. d
$. a
.. b
0. c
7. c
:. d
;. d
<. b
>. b
1@. a
11. a
EX 4-2
1. e
$. m
.. e
0. h
7. h
:. B
;. f
<. c
>. p
1@. p
050
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
EX 4-
1.
2!14
a!
%roperty ta#es receivable C1;@,@@@,@@@
/llowance for uncollectible ta#es C 1,;@@,@@@
4eferred inflows of resources 1:<,.@@,@@@
o record !"#$ ta% levy and defer revenue prior to payment due date
b!
*ash C1$@,@@@,@@@
%roperty ta#es receivable C1$@,@@@,@@@
o record the collection of cash
4eferred inflows of respources C1$@,@@@,@@@
%roperty ta# revenues C1$@,@@@,@@@
o recogni&e revenue on the ta%es collected subsequent to due date
c!
*ash C 07,@@@,@@@
%roperty ta#es receivable C 07,@@@,@@@
o record collection of property ta%es in 'anuary and (ebruary
4eferred inflows of resources C 07,@@@,@@@
%roperty ta# revenues C 07,@@@,@@@
o recogni&e revenue on the ta%es collected in 'anuary and (ebruary !"#)
%roperty ta#es receivabledelin+uent C 7,@@@,@@@
%roperty ta#es receivable C 7,@@@,@@@
o reclassify !"#$ ta%es as delinquent
2!1"
d!
%roperty ta#es receivable C1>@,@@@,@@@
/llowance for uncollectible ta#es C $,@>@,@@@
4eferred inflows of resources 1<;,>1@,@@@
o record !"#) ta% levy
057
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
e!
*ash C1:0,0@@,@@@
%roperty ta#es receivable C1:@,@@@,@@@
%roperty ta#es receivabledelin+uent $,7@@,@@@
%roperty ta#es collected in advance 1,>@@,@@@
o record ta%es collected in !"#) including those applicable to !"#$ and !"#) as well as
!"#6
4eferred inflow of resources C1:$,7@@,@@@
%roperty ta# revenues C1:$,7@@,@@@
o recogni&e revenue on the ta%es applicable to !"#$ and !"#)
f!
/llowance for uncollectible ta#es C 1,@@@,@@@
%roperty ta#es receivabledelin+uent C1,@@@,@@@
o write-off uncollectible ta%es
$. ,n its government5wide, full accrual statements, the county would recognize as
revenue the full amount of the ta# levy less the estimated allowance for uncollectible
ta#es! in the year of the ta# levy. )he county would not have to distinguish between
ta#es collected in the first :@ days of the following year and those e#pected to be
collected thereafter.
EX 4-4
1.
2!14
No entry is necessary* he city has not fulfilled the eligibility requirements and has no
claim to the grant*
2!1"
A#penditures C .@,@@@
*ash C .@,@@@
o record grant-related e%penditures
(rants receivable C 1@,@@@
*ash C $@,@@@
(rant revenue C.@,@@@
o recogni&e revenue from grants +on the basis of e%penditures,
05:
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
2!1#
A#penditures C1$@,@@@
*ash C1$@,@@@
o record grant-related e%penditures
*ash C1.@,@@@
(rant revenue C1$@,@@@
(rants receivable 1@,@@@
o recogni&e revenue from grants +on the basis of e%penditures, and collection of
amounts from current and past year e%penditures
$. )he city would recognize the same amount of revenue in each of the three years as it
did in the entries above i.e., C@ in $@10, C.@,@@@ in $@17 and C1$@,@@@ in $@1:.
8eimbursement grants are &e#penditure driven.' /s long as the funds are &available,'
revenue should be recognized in the same period as the e#penditures.
.. Dnrestricted grants may be recognized in the period the award is announced, as long
as the resources are available for e#penditure in that period. )hus, the entire
C17@,@@@ may be recognized as revenue in $@10.
EX 4-"
a$ %odified accrual &asis
1!
*ashC$@,@@@,@@@
%roceeds from borrowing C$@,@@@,@@@
)o record the issuance of bonds capital proBects fund!
$!
A#penditure Building! C$@,@@@,@@@
*ash C$@,@@@,@@@
o record the acquisition of a building +capital pro-ects fund,
.!
2o entry re+uired. 4epreciation is not recognized in fund statements that are on a
modified accrual basis.
05;
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
0!
Operating transfer5out to debt service fund C$,@:@,@@@
*ash C$,@:@,@@@
o record the transfer from the general fund to the debt service fund +-ournal entry made
in the general fund,
*ashC$,@:@,@@@
Operating transfer5in from the general fund C$,@:@,@@@
o record the transfer from the general fund to the debt service fund +-ournal entry made
in the debt service fund,
7!
A#penditure principal C$,@@@,@@@
A#penditure interest :@,@@@
*ash C$,@:@,@@@
o record the payment of principal and interest +-ournal entry made in the debt service
fund,
:!
*ashC7,@@@,@@@
%roceeds from sale of land C7,@@@,@@@
o record the sale of land +-ournal entry made in the general fund,
&$ Full accrual &asis
1!
*ashC$@,@@@,@@@
Bonds payable C$@,@@@,@@@
o record the issuance of bonds
$!
Building C$@,@@@,@@@
*ash C$@,@@@,@@@
o record the acquisition of a building
.!
4epreciation e#pense C.@@,@@@
/ccumulated depreciation vehicles C.@@,@@@
o record depreciation on vehicles
05<
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
0!
2o entry is re+uired to record a transfer from one fund to another in as much as
government5wide statements are consolidated statements and hence the effect of interfund
transactions is eliminated.
7!
Bond ,nterest e#pense C :@,@@@
Bond payable $,@@@,@@@
*ash C$,@:@,@@@
o record the payment of bond interest and principal
:!
*ashC7,@@@,@@@
Eand C0,@@@,@@@
(ain on sale of land 1,@@@,@@@
o record the sale of land
c. )he two types of statements have different obBectives. )he government5wide
statements present a picture of the government as a whole9 the fund statements show
the government as a collection of separate funds. )he government5wide statements,
which are on a full accrual basis, better measure the e#tent to which the government
achieved interperiod e+uity. )he fund statements, by contrast which may be on either
a modified or full accrual basis, depending on whether they are of a governmental,
proprietary or fiduciary type! are more closely tied to the obBective of reporting on
budgetary compliance.
EX 4-#
1.
Eand to be used as a par=
No entry necessary* .apital assets are not recogni&ed in governmental funds*
Eand to be sold
Eand held for sale C..@
8evenue from donations C..@
o record the donation of the land +he land was sold within the availability period
and hence the contribution can be recogni&ed as revenue
*ash C..@
05>
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
Eand held for sale C..@
o record the sale of the land +his entry would be made the following year upon
sale of the land*,
$. *apital assets are not generally recorded in governmental funds inasmuch as the
measurement focus of these funds is on net financial resources. -owever, owing to
the intent of the county, the land held for sale has the characteristics of an investment
rather than a capital asset. )herefore it should be accounted for as an investment and
recorded in a governmental fund as long as it were sold by the time the financial
statements are issued!.
.. ,n the county?s government5wide statements, both parcels of land would be recorded
as assets and correspondingly both gifts would be recognized as revenue.
0. ,f the land were not sold by the time the financial statements were issued then it
would not be shown as an asset on the funds statement balance sheet or reflected as
revenue on the funds statement of revenues and e#penditures. ,t would, however, be
shown on the government5wide statement of net assets as an asset reported at
estimated mar=et value! and reflected on the government5wide statement of activities
as revenue from donations
EX 4-'
1. (tate)s entr* for 2!14
)a#es receivable C77@
1ales ta# revenues C77@
o record sales ta%es for !"#$ +the entire amount/ inasmuch as the ta%es were remitted
within #) days of the close of the year and thus were available0,* )he ta#es collected in
"ebruary were applicable to $@17 and thus are given no recognition on the $@10
statements.
$. +it*)s entr* for 2!14
)a#es receivable C 77
1ales ta# revenues C 77
o record sales ta%es for !"#$* )he city would recognize the entire amount of its share of
ta#es inasmuch as the ta#es would be received in time to satisfy the &available' criterion.
051@
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
.. )he city would not recognize any revenue inasmuch as the ta#es would not be
received in time to satisfy the &available' criterion assuming a :@5day cut5off!. ,f, by
the time it prepared its $@10 financial statements, it could estimate the amount to be
received then it should ma=e the following entry3
)a#es receivable C 77
4eferred sales ta# revenues C 77
o record sales ta%es of !"#$ to be recogni&ed as revenue in !"#)
,n its government5wide statements, the city could recognize the C77 million as
revenue of $@17. ,t would not matter when the ta#es would be collected.
EX 4-,
1. "ines can be recognized when the government has an enforceable legal claim in this
e#ample on 1eptember 17! or when cash is collected. )hus
*ash C07,@@@
8evenue from fines C07,@@@
o recogni&e cash collected from par1ing fines
$. )here would be no difference in the government5wide statements. )he ma#imum
revenue that can be recognized is the amount collected, since the protest period has
not yet e#pired.
EX 4--
Road repair grant
*ash C$@@,@@@
(rant revenue C$@@,@@@
o record grant revenue* Aven though the grant must be used for a special purpose and
hence should be recorded in a special revenue fund!, the town can recognize revenue at
the time the grant is awarded.
Reimbursement grant
8oad repair e#penditures C17@,@@@
*ash C17@,@@@
o record road repair e%penditures
0511
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
*ash C17@,@@@
(rant revenue C17@,@@@
o record grant revenue* )he town can recognize revenue only for the amount it is
eligible to receive the amount of allowable e#penditures.
Entitlement grant
*ash C$@@,@@@
4eferred revenue C$@@,@@@
o record grant revenue* )he grant is subBect to a time re+uirement and hence the town
cannot recognize revenue until that re+uirement is satisfied i.e., in $@1:.
+ontinuing .ro&lem
+it* of /ustin F0 2!11
1. )he largest source of government?s revenues from governmental activities is
property ta#es with C.77,1<7,@@@ in $@11. %er the government5wide statement of
activities, the largest single source of revenues in $@11 was from electricity a
business5type activity! gross Bust over C1,$0> million from charges for services
and C1@.$ million from capital grants, net C1$$.77@ million. )he second largest
was from another business5type activity, water C$0...<$ million and C1..>:0
million, respectively, from charges for services p. 1<!.
$. %roperty ta# revenues are shown as a single amount in the "und and (overnment5
wide "inancial 1tatements. -owever, there are tables in the statistical section
which brea= down property ta#es into categories. "or instance, on page $@$,
property ta# is bro=en out by class. 7$.;F comes from single family property,
1$.7F is from multi5family property, 1.<F from land, commercial property
accounts for $0F, and finally >F is from personal property.
.. Of the governmental activities, public safety had the greatest amount of identifiable
revenues C7$.>>< million in charges for services and C1@.@>< million in
operating grants and contributions p. 1<!.
0. 2ote 1c provides a general discussion of the measurement focus, basis of
accounting and financial statement presentation. )he government5wide financial
statements are reported using the flow of economic resources measurement focus
and the accrual basis of accounting. 8evenues are recorded when earned and
e#penses are recorded when a liability is incurred, regardless of the timing of
related cash flows. (overnmental fund financial statements are reported using the
current financial resources measurement focus and the modified accrual basis of
accounting. )his basis of accounting recognizes revenues in the accounting period
in which they become susceptible to accrual, i.e. both measurable and available.
8evenues are considered available if they are collected within :@ days of year5end
p. 01!.
051$
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
7. Ges, the governmental funds balance sheet report deferred revenue p.$@!. )he
notes to the financial statements do not e#plicitly indicate the nature of the
deferred revenue. )ypically, however the deferred revenues are from property
ta#es and interests that are not available as current5period resources and are not
reported in the funds.p. $1!
:. /s indicated in the schedule for /ssessed )a#able %roperty 6alue by *lass, the ta#
rate is C@.07;1 per C1@@ assessed value of property p. $@0!.
;. /s indicated in the schedule &%roperty /ppraised 6alue, )a# 6alue, )a# 8ates, )a#
Eevies, and )a# *ollections,' which is included in the statistical section of the
*/"8, in each of the last ten years the ratio of assessed value to mar=et value is
<<.17F p$@1!
<. )he *ity?s property ta# is levied each October 1 on the assessed value listed as of
Hanuary 1 for all real and personal property located in the *ity. )a#es are due by
Hanuary .1 following the October 1 levy date and interest and payments begin to
accrue on "ebruary 1. p7:, note 0!
>. %er the schedule, &)a# 8evenue by source, (overnmental funds,' which is
included in the statistical section, the three largest ta#es are property ta#, sales ta#
and franchise feesIgross receipts ta#. %roperty ta#es increased from $17,<.<
million to C.77,$:$ million :7.11F!, sales ta# increased from C117.001million to
C171.1$7 million .1.@.F!, and franchise ta#es increased from C:$.0.7 million to
C>0.>$ million 71.:1F! p. 1>>!.
1@. Ges. )he city did generate revenue from fines. )hese were reported in (eneral
"und 1chedule of 8evenues5 Budget and /ctual5Budget Basis p11.! as well as
governmental funds5 statement of 8evenues, A#penditures, and *hanges in "und
Balances p$$!. )hey are not e#plicitly reported in the government5wide
statements. -owever, since the fines would not fit into any of the general revenue
categories of the statement of activities, they are reported as special revenues
associated with public safety, as &charges for services.'
051.
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
.ro&lems
. 4-1
1. (overnmental fund3 C.@@ million
(overnment5wide3 C.@@ million
)he grant is subBect to a time restriction9 the funds must be used in years $@17
through $@1<. ,t is apparently not a reimbursement grant since the cash was received
before any e#penditures were incurred. ,nasmuch as all eligibility re+uirements were
apparently met by the time the grant was received and can be spent any time starting
in $@17, the entire amount of revenue can be recognized in $@17.
$. (overnmental fund3 C1$,@@@

(overnment5wide3 C1$,@@@
,nvestments are mar=ed to mar=et in both fund and government5wide statements.
.. (overnmental fund3 C0<: million

(overnment5wide3 C0>0 million
)he general rule is that revenue should be recognized in the period to which it is
applicable. -owever, in the funds statements, it must also be available, which for
property ta#es means collected within :@ days after year5end.
0. (overnmental fund3 C1,@7@,@@@

(overnment5wide3 C1,@7@,@@@
)he government could recognize as revenue the full amount of the gift, plus interest,
even though the principal can never be spent. )he gift would be reported in a
permanent fund, which is a governmental fund.
7. (overnmental fund3 C$: million

(overnment5wide3 C$: million
On5behalf benefits must be recognized as revenue by the beneficiary government.
)hey would be accounted for the same way in both governmental funds and
government5wide statements.
0510
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
.$ 4-2
1. Government mandated$
(rant receivable C$@
(rant revenue C$@
o record a state disability grant /t the time the award is announced the city had fulfilled
all eligibility re+uirements. )here are no time5re+uirements9 the funds can be spent at any
time. -ence revenue can be recognized as soon as the grant is announced. )he transaction
should be recorded, however, in a special revenue fund as the grant is subBect to a purpose
restriction.!
$. Derived tax$
*ash C0@,@@@
8eal estate transaction ta#es receivable $@,@@@
8eal estate transaction ta# revenue C:@,@@@
o record real estate transaction ta% revenue )he ta# should be recorded in the period in
which the underlying transaction ta=es place, even if it is not collected in that period.!
.. 1oluntar*$ 2o entry necessary. )he grant is subBect to a time re+uirement9 it must be
spent in $@1:. Dntil $@1:, the city is ineligible for the grant.
0. 2m3osed$
*ash C07@,@@@
Boat ta#es receivable 1>@,@@@
4eferred ta# revenue C:0@,@@@
o record !"#6 boat ta%es )he city has an enforceable legal claim to the ta# in $@17 and
should recognize the cash and receivables in that year. -owever, the ta#es are applicable
to $@1: and should be recognized as revenue in that year.!
7. 1oluntar*$ 2o entry is necessary. )he donation is contingent upon the death of the
donor and cannot be recognized until the contingency occurs.
:. 1oluntar*.
Eaw enforcement grants receivable C$@@,@@@
(rant revenue C$@@,@@@
o recogni&e revenue from a 'ustice 2epartment grant )his is a reimbursement5type
grant. )he city is eligible for the funds only when it incurs allowable costs. ,t should
therefore delay recognition of the grant until then.!
0517
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
;. 1oluntar*$
,nvestments C1@
8evenue from donations C1@
o recogni&e revenue from the donation of an endowment gift 1ince this gift is intended
to provide an ongoing benefit, revenue can be recognized upon receipt. -owever, it
should be accounted for in a permanent fund rather than the general fund.!
.$ 4-
1. *omputation of ta# rate in thousands!3
)otal assessed value of property C>@@,@@@
Eess3 A#emptions . percent! $;,@@@
2et assessed value of property C<;.,@@@
8e+uired ta# levy before discount C $$,7@@
4ivided by yield after $ percent discount .><
8e+uired ta# levy after discount C $$,>7>
)a# rate J C$$,>7>IC<;.,@@@ J $.:. percent J $:.. mils
$. )a# on resident with C.@@,@@@ home
/ssessed value of home C.@@,@@@
Eess e#emptions 17,@@@
2et assessed value C$<7,@@@
)a# rate # .@$:.
)a# C ;,0>:
..
a. ,f the county ta# rate were < mils, then the Blair resident would pay a ta# of C$,0@@
.@@< # C.@@,@@@! whereas the 1usse# resident would pay ta# of only C1,>$@ .@@< #
C.@@,@@@ # .<!.
b. (overnments &e+ualize' property ta# assessments i.e., assure that they are assessed
at a common percentage! to eliminate the ine+uities suggested by this problem.
051:
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
.$ 4-4
1.
a. Dnder the modified accrual basis, the city would recognize the following amount as
revenue for the fiscal year ending Hune .@, $@1:3
*ollections of Hune $@17 reported as
year5end Hune $@17 deferred revenue! C 1@@
*ollections from Huly $@17 through Hune $@1: .,:@@
*ollections in Huly and /ugust $@1: within :@ day period! <@
)otal collections C.,;<@
Eess3 estimated refunds .@
8evenue to be recognized C.,;7@
4eferred revenueproperty ta#es C 1@@
*ash .,:@@
)a#es receivable .@@
/llowance for refunds C .@
/llowance for uncollectible ta#es ;@
4eferred revenueproperty ta#es 17@
8evenueproperty ta#es .,;7@
o summari&e property ta% activity for the fiscal year ending 'une 3"/ !"#6
2otes3
)he debit to deferred revenues represents the ta#es collected, in advance, in Hune $@17.
)he credit to deferred revenues represents the ta#es to be collected subse+uent to /ugust
$@1: i.e., subse+uent to the :@5day availability period!.
)a#es receivable represents the full amount of the ta# balance outstanding as of Hune .@,
$@1:.
b. Dnder the full accrual basis the city would recognize as revenue all ta#es levied less
anticipated uncollectible ta#es and refunds!, irrespective of when they were e#pected
to be collected. -ence the amount to be recognized would be C.,;7@ per above!
plus the C17@ to be collected subse+uent to /ugust $@1: C.,>@@.
4eferred revenueproperty ta#es C 1@@
*ash .,:@@
)a#es receivable .@@
/llowance for refunds C .@
/llowance for uncollectible ta#es ;@
8evenueproperty ta#es .,>@@
o summari&e property ta% activity for the fiscal year ending 'une 3"/ !"#6
051;
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
$. On a full accrual basis the financial statements would report C17@ more in revenues
and C17@ less in deferred ta# revenues hence C17@ more in fund balance net
assets!.
.. ,f in fiscal $@1; and subse+uent years, there were no changes in either the ta# levy or
the pattern of collections, there would be no difference in ta# revenues. Dnder the
modified accrual basis, the ta#es collected between 1eptember $@1: and Hune $@1;
would be recognized as revenues of fiscal year $@10 whereas those collected
between 1eptember $@1; and Hune $@1< would be deferred. On a full accrual basis
the ta#es collected between 1eptember $@1: and Hune $@1; would have already been
recognized as revenues of fiscal year $@1: but those collected between 1eptember
$@1; and Hune $@1< would now be recognized as revenues of fiscal year $@1;. )he
full accrual statement of net position, however, would continue to report C17@ less in
deferred revenues and C17@ more in net position.
.$ 4-"
1. 1tate?s sales ta# activity
a. %odified accrual &asis
1ales ta#es receivable C$0@
1ales ta# revenue C$0@
o recogni&e revenue from sales ta%es
b. Full accrual &asis
1ales ta#es receivable C$0@
1ales ta# revenue C$0@
o recogni&e revenue from sales ta%es
,n this e#ample, there is no difference between the two bases. )he ta#es will be collected
within 17 days well within the &available' cut5off date.
4ote5 67at t7e state is a 83ass-t7roug79 for t7e +ount*)s s7are of taxes$ 2t s7ould
also 3ro3erl* account for t7e :#!% t7at it collected on &e7alf of t7e counties in an
/genc* fund
$. *ounty?s sales ta# activity
a$ %odified accrual &asis
1ales ta#es receivable C:@
1ales ta# revenue C:@
o recogni&e revenue from sales ta%es
051<
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
)he criteria for revenue recognition are unaffected by whether the state or the county
initially collects the ta#es as long as under the modified accrual basis! they will be
available for e#penditure in the current year.
&$ Full accrual &asis
1ales ta#es receivable C:@
1ales ta# revenue C:@
o recogni&e revenue from sales ta%es
.. ,t could be argued that sales ta#es should not be recognized until the date at which
the merchant is re+uired to remit the ta#es to the government. Dntil that date, the ta#
is not measurable by the government and the government is not legally entitled to the
funds.
*urrent standards 1tatement 2o. ..! place greater emphasis upon economic
substance than legal form. )hey are based on the principle that the sales ta#es are
derived from the underlying sale transaction and should therefore be recognized at
the time of sale.
.$ 4-#
1.
A#penditures related to grants C$,;@@,@@@
*ash C$,;@@,@@@
o record e%penditures related to grants C.@@,@@@ per month for the nine5month period
beginning Hanuary 1, $@17 and ending 1eptember .@, $@17!
*ash C$,1@@,@@@
(rants receivable :@@,@@@
(rant revenues C$,;@@,@@@
o record grant revenues K*ash receipts of C.@@,@@@ per month for the seven months
March $@17 through 1eptember $@17 which reimbursed costs incurred from Hanuary
$@17 through Huly $@17! plus receivables for costs incurred in /ugust and 1eptember
$@17. 2o recognition is given to the portion of the grant for costs e#pected to be incurred
in the fiscal year ending 1eptember .@, $@1:, since the county has not yet satisfied its
eligibility re+uirements.L
$. Dnder the modified accrual basis, that which underlies fund financial statements,
resources must be measurable and available to meet current year obligations if they
are to be recognized as revenues. ,n this e#ample, the resources are to be received
more than :@ days after the close of the year beyond the point usually established
to determine whether resources are &available.' 8eimbursement type grants should
be recognized as revenue in the period that the allowable costs are incurred.
)herefore, since the related e#penditures were recorded in the fiscal year ending
051>
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
1eptember .@, $@17, it would seem appropriate that the revenues also be recorded in
that year.
.$ 4-'
1.
*ash C.:,@@@
8evenue from license fees C.:,@@@
o record license fees
$. )he license fees in this e#ample are more in the nature of none#change revenues. )he
two parties to the transaction the government and the licensee! do not engage in an
e#change of goods, services or cash of e+ual value and the e#change is less than
voluntary on the part of the licensee. 2evertheless the (/1B has stated that license
fees should be accounted for as if they were e#change transactions.
.. ,t can easily be contended that, consistent with the accrual basis of accounting, the
license fees should be recognized as revenue over the period covered. *urrent (/1B
standards state, however, that &the vast multitude of miscellaneous e#change
revenues are best recognized when cash is received.'
.$ 4-,
1.
A#penditures C1,0@@,@@@
*ash C1,0@@,@@@
o record -ob opportunity program e%penditures
*ash C 7@@,@@@
(rants receivable :@,@@@
(rant revenue C 7:@,@@@
o recogni&e revenue on the -ob opportunity grant based on e%penditures +$"4 of
5#/$""/""",
A#penditures C77@,@@@
*ash C77@,@@@
o record day-care program e%penditures
*ash C:@@,@@@
(rant revenue C:@@,@@@
o recogni&e revenue on the day-care program grant
$. )he first grant is clearly a reimbursement grant. -ence revenue should be recognized
as e#penditures are incurred. )he second grant, however, is unrelated to
05$@
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
e#penditures. Aven though the grant is intended to cover two years, the city is not
obligated to spend it over that period. Moreover, while the grant is restricted to day5
care e#penditures, it is not a reimbursement grant. ,t can be used to cover any costs.
)here are no constraining time re+uirements and therefore the grant can be
recognized in the year awarded.
.$ 4--
1. %er (/1B 1tatement 2o. $0, &as a general rule, cash pass5through grants should be
recognized as revenue and e#penditures or e#penses in governmental, proprietary, or
trust funds.' Only in those &infre+uent cases' in which the government serves as only
a &cash conduit,' may pass5through grants be reported in an agency fund. /
government serves as a &cash conduit,' according to the (/1B, if it &merely
transmits grantor5supplied moneys without having Madministrative involvement?.'
&/dministrative involvement' would be indicated if the government selected the
secondary recipients of the funds even based upon grantor5established criteria! or
monitored compliance with grant re+uirements.
2ew Gor= neither selects recipients nor monitors compliance. -ence it appears to
serve only as a cash conduit and therefore it should not recognize the assistance as
revenues and corresponding e#penditures.
$. *leveland has monitoring responsibility and therefore must record the awards as both
revenues and e#penditures.
.. /lthough 1anta "e clearly has administrative involvement, it serves as a contractor.
)he grants are not even for the e#clusive benefit of 1anta "e residents. *onsistent
with 1tatement 2o. $0, which deals only with states, 1anta "e should recognize the
administrative costs as e#penditures and the contract fees as miscellaneous revenues.
,t need not recognize the receipt of the stamps as revenues and the disbursement as
e#penditures.
0. %er the (/1B, a recipient government should recognize both a revenue and a
corresponding e#penditure for all on5behalf payments irrespective of whether it is
legally responsible for their payment. -ence, /rlington should recognize both a
revenue and an e#penditure in the amount of the premiums paid by the state.
.$ 4-1!
1. )his is a reimbursement grant. )he district is eligible for the grant only to the e#tent
that it incurs allowable costs. -ence, it can recognize revenue only as it incurs the
allowable costs, presumably in $@1:.
$. )his grant is subBect to a purpose restriction. %urpose restrictions do not affect the
timing of revenue recognition. )he district has apparently satisfied all eligibility
re+uirements and can recognize revenue upon receipt of the funds, in $@17.
05$1
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
.. )his grant is contingent upon the district conducting the wor=shops. ,t can recognize
revenue only after it has conducted them, presumably in $@1:.
0. )his grant is subBect to a time re+uirement. )he funds cannot be used prior to
Hanuary 1, $@1: and hence cannot be recognized as revenue earlier than that. )hey
should be recognized, therefore, in $@1:.
.$ 4-11
1. %roperty ta#es
"und statements
)he C$ million in property ta#es would no longer be available for e#penditure in $@17
since they would be received more than :@ days after the close of the year. )herefore they
could not be recognized as revenues.
(overnment5wide statements
)he change would have no impact on the government5wide statements. )he &available'
criterion does not have to be satisfied.
$. 1ale of land
"und statements
1ale of the land would increase reported revenues by the sale price, which presumably will
e+ual the mar=et value of C7@@,@@@. )he land would not be reported in the general fund
since it is a capital asset. -ence the entire sales proceeds would be reported, in the general
fund, as &proceeds from sale of land,' the e+uivalent of revenue.
(overnment5wide statements
1ale of land would increase net revenues by only C7@,@@@. )he land would be reported as
an asset at historical cost. )he net revenues i.e., the gain on sale of land! would be the
sales proceeds of C7@@,@@@ less the boo= value of C07@,@@@.
.. 4onation
"und statements
)he donation of the laboratory e+uipment would have no impact on the general fund,
irrespective of when received, since it is a capital asset and capital assets are not reported
in governmental funds. /lthough there are no (/1B pronouncements that specify
whether the donated land can be recognized as revenue, the ("O/ recommends that in
fund statements the revenue be recognized only when the land is actually sold.
05$$
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
(overnment5wide statements
Both the donated e+uipment and the donated land would be recognized as assets on the
government5wide statements. 8evenue from the donations would be recognized in the
period of the donation assuming all eligibility re+uirements have been met!. )herefore, by
advancing the date of the donations, the district could also advance the date of revenue
recognition.
0. ,nvestments
"unds statements
/ssuming that the shares are carried at fair i.e., redemption! value, redemption of the
shares would have no impact on reported revenues. )he redemption would result only in
an increase in cash and a decrease in investments.
(overnment5wide statements
1ame
7. 1ale of par=ing permits
"und statements
1elling par=ing permits in the 1pring instead of the "all would advance the revenues from
fiscal $@1: to fiscal $@17. )he sale of permits is an e#change transaction. /ccording to
(/1B, &golf and swimming fees, inspection charges, par=ing fees and par=ing meter
receipts, and the vast multitude of miscellaneous e#change revenues are best recognized
when cash is received.'
(overnment5wide statements
1ame
.$ 4-12
1.
Gear ending 4ecember .1, $@17
*ash C77
%roperty ta#es receivable C$7
4eferred revenue from property ta#es C<@
o record property ta%es received in !"#) that were levied for the year ending 2ecember
3#/ !"#6
2o entry is necessary to recognize the grants.
05$.
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
Gear ending 4ecember .1, $@1:
*ash C$7
4eferred revenue from property ta#es <@
%roperty ta#es receivable C$7
8evenue from property ta#es <@
o recogni&e property ta% revenue
*ash C .
8evenue from state grants C .
o recogni&e revenue from state grants
$. Aven though the property ta#es are intended for the fiscal year ending 4ecember .1,
$@1: the town has an enforceable legal claim to them in the year ending 4ecember
.1, $@17. )herefore the town can recognize a receivable in the year ending
4ecember .1, $@17. By contrast the town is not eligible for the state grant until the
applicable time re+uirement has been met. )he time re+uirement, imposed by the
state, specifies that the grant cannot be used until $@1:. )herefore, per the (/1B,
the town should not recognize a receivable until that date.
.$ 4-1
1. ,nvestment gain loss!
Outputs
1ales C $7@
Anding balance N fair value >07 C1,1>7
,nputs
Beginning balance N fair value C <<@
%urchases ..@ 1,$1@
,nvestment gain loss! C 17 !
$. )he only realized gain was on the sale of 1ecurity * sales proceeds of C$7@ less
cost of C$@@ a gain of C7@. ,f the government intends to hold, rather than sell, its
securities, then arguably the realized gain is the better indicator of the increase in
resources available for current e#penditure. -owever, as long as the investments will
at some time be available for sale, then as the result of the changes in the fair value of
the securities the government has realized an economic gain. ,n that sense, therefore,
the reported gain is the better measure of the increase in resources available for
future e#penditure.
.. )he decline in fair value is most probably due to an increase in prevailing interest
rates. )he loss is indicative of an economic loss in that the government has incurred
an opportunity cost. )he government is loc=ed into 1ecurity B, which earns interest
at a lower rate than it could have otherwise earned had it had the opportunity to
ac+uire bonds that pay interest at the prevailing rate.
05$0
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
.$ 4-14
1. /ssuming no change in prevailing interest rates, the mar=et value of each of the three
investments could be e#pected to be C1,@@7,@@@ the initial investment of
C1,@@@,@@@ plus a return of @.7 percent for the one month that they were held.
$. :@5day note
,nvestments C7,@@@
,nvestment revenue C7,@@@
o record 3" days interest amorti&ation on discount note
)wo5year note
,nvestments C7,@@@
,nvestment revenue increase in fair value of investments! C7,@@@
o record the increase in the fair value of the investments
,nvestment pool
,nvestments C7,@@@
,nvestment revenue increase in fair value of investments! C7,@@@
o record the increase in the fair value of the investments
.. ,t can be said that the entry for the two5year note is inconsistent with the general rule
that revenues must be measurable and available in that the investments will not
mature, and the cash will be not be received, until $. months after the close of the
year well beyond the point at which they are available to finance e#penditures of
the current year. On the other hand, it can be argued that they are consistent with the
rule in that the investments can be sold at any time, most li=ely at a price that reflects
the interest earned.
.$ 4-1"
1. )he school district would be re+uired to recognize both an e#penditure and revenue.
%ension e#penditures C$0@,@@@
1tate aidpensions C$0@,@@@
o record the on-behalf payments made by the state
$. )he main argument in favor of re+uiring that the district charge e#penditure for
payments made by it on behalf of the state is that its financial statements should
reflect the full cost of providing the service. /s implied by the second +uestion, if the
state had given the money to the district and the district had made the payment, there
would be little +uestion but that the district should report the pension payments as
05$7
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
e#penditure. On the other hand, it can be asserted that the district did not actually
ma=e the payment, it had no control over state?s decision to ma=e the payment, and it
would not have otherwise increased its compensation costs.
.. )his e#ample differs from the previous one in that the state is now ma=ing a payment
for which the district otherwise has been responsible and would have underta=en.
)herefore, the case is somewhat stronger that the district should be re+uired to
report the state?s contribution as an e#penditure.
.$ 4-1#
,n its &Basis for *onclusions' to 1tatement 2o. .. para. 7@!, the (/1B notes that
certain transactions have the characteristics of e#change transactions in that there is an
identifiable e#change between the parties, but the values e#changed are not necessarily
e+ual. A#amples, it says, &include certain fees for regulatory or professional licenses and
permits, passenger facility charges, certain tap fees, certain developer contributions,
certain grants and donations, and other transactions that, regardless of the label applied to
them, are based on an e#change of similar but not e+ual values.' /ccording to the Board
&e#change5li=e transactions should be accounted for in the same way as Mpure? e#change
transactionsthat is, based on occurrence of an e#change between the reporting
government and another party or parties.' )herefore, it notes, 1tatement 2o. .. does not
apply to e#change5li=e transactions, since it addresses only none#change transactions.
-owever, e#cept to say that the &vast multitude of miscellaneous e#change transactions
are best recognized when cash is received,' the (/1B does not provide ade+uate
guidance on how the hybrid transactions should be accounted for. /ccordingly, the
recommendations below are merely one of several possibilities and are not necessarily
supported by specific authoritative pronouncements.
1. Eand from developer. /lthough the developer obviously received a benefit, it is
difficult if not impossible! to value the government?s economic sacrifice. Moreover,
unless the government intends to sell it, the land should not be recorded in the
general fund or any other governmental fund. )herefore, the government should
account for the contribution as a none#change transaction, recognizing no revenue in
its governmental funds.
$. 8esearch grant. )his is more clearly an e#change transaction see e#ample $$ in the
appendi# to (/1B 1tatement 2o. ..!. /ccording to the (/1B &assets and revenues
should be recognized when the e#change occurs.' -owever, recognizing revenue
&when the e#change occurs' as opposed either to over the period the research is
carried out or to when it is completed appears inconsistent with the accrual full
or modified! basis of accounting. )herefore, it would seem preferable to recognize
revenue as the research is carried out on a percentage of completion basis! or when
it is completed and the results are turned over to the company.
.. ,mpact fee. )he (/1B in 1tatement 2o. .. recognizes that impact fees may be, at
least in part, nonvoluntary contributions. 2evertheless, it directs that they be
05$:
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
accounted for as pure e#change transactions. 1ince the government has a
commitment to ma=e improvements in the future and the fee is intended to fund
those improvements, it seems reasonable to delay recognition of the revenue until the
city incurs the e#penditures for the improvements.
0. Eicense fee. *urrent pronouncements ma=e it clear that license fees should be
accounted for as e#change transactions but should nevertheless be recognized as
revenue when cash is received. 1till, the city will be carrying out the inspections over
the entire year and will be incurring the e#penses over the year. )herefore, in the
spirit of 1tatement 2o. .0 a persuasive argument could be made for recognizing the
license revenue over the term of the license.
7. )ennis permits. )he tennis permits are more in the nature of e#change transactions,
even if the fees do not cover the entire cost of providing the service. ,n concept, the
fees should be recognized over the period covered by the permit i.e., which may
overlap two fiscal years!. -owever, inasmuch as the permit fees are li=ely to be
merely miscellaneous revenues, the city could reasonably recognize them as they are
collected.
Questions for Researc7; /nal*sis and Discussion
1. Obviously it can and has been argued that the (/1B is inconsistent in applying
a si#ty5day rule to property ta#es, but no to other revenues. )he board e#plicitly
addressed this issue when it was considering the issue of its ,nterpretation 2o. 7,
&%roperty )a# 8evenue 8ecognition in (overnmental "unds.' ,t concluded3
/lthough some respondents to the A4 +uestioned the si#ty5day provision, the
Board believes that the great disparity that e#ists in ta# calendars and collection
periods from government to government distinguishes property ta#es from other
types of none#change revenues, and in the interest of consistency, it is appropriate
to continue to apply the si#ty5day collection re+uirement.
$. 2o. )he district does not have a claim upon the resources until the state appropriates
the funds. /s e#plained in the (/1B *omprehensive ,mplementation (uide, Ouestion
;.07<3
)he state should appropriate resources before the city can recognize the grant
revenue. %aragraph ;0 in the Basis for *onclusions of 1tatement .. states that,
&KwLhen the provider is a government, the re+uired period of disbursement often is
specified through the appropriation of resources under the enabling legislation,
rather than as part of that legislation or related regulations. )he Board believes
that, in those cases, a government appropriation is not e+uivalent to an
authorization to pay an e#isting liability, such as the approval of a vendor?s invoice
for payment related to an e#change transaction that has occurred. 8ather, an
appropriation is essential to ma=e the enabling legislation effective for a particular
period of time. ,n these circumstances, the Board believes that a government does
05$;
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
not have a liability to transmit resources under a particular program, and a
recipient does not have a receivable, unless an appropriation for that program
e#ists and the period to which the appropriation applies has begun. Once those
re+uirements and all other applicable eligibility re+uirements! have been met, a
provider government should recognize a liability and a +ualified recipient should
recognize a receivable. .'
.. Ges. /s with not5for5profit organizations, restricted resources can generally be
released from restrictions as soon as the government as spent money from any source
for the restricted purpose. (/1B *omprehensive ,mplementation (uide, Ouestion
;.00< confirms this opinion3
Ges. (overnments should have a policy regarding whether to first apply restricted
or unrestricted resources when an e#pense is incurred for purposes for which both
restricted and unrestricted net assets are available. 1ubparagraph 117 of
1tatement .0 re+uires governments to disclose that policy.!
0. )he fines should be reported as public safety program revenues even if by state law
they must be considered general revenues and cannot be restricted for a specific
purpose. (/1B *omprehensive ,mplementation (uide, Ouestion ;.1<@ states3
*harges for services, which include fines, should be reported as a program revenue
of the function that generates them, regardless of whether there are restrictions or
limitations on the use of that revenue. "ees, fines, and charges do not have to be
based on the cost of the underlying program or function. )he concept of &net
cost' reporting in the statement of activities is based on the notion that all
functions or programs re+uire the use of government resources, and some
contribute to the government?s resources by generating revenues through fees,
fines, and charges or by accepting grants and contributions from parties outside the
government. )he &net cost' of a function or program is the difference between a!
e#pense and b! the charges, fees, and fines that derive directly from it and the
grants and contributions that are restricted to it.
2evertheless, some might argue that the government should follow the law and, if
the amounts are material ma=e disclosures in the notes to the financial statements about
the differing treatments prescribed by law and by (//%.
7. )he provision of the rent5free facilities can be considered on5behalf payments. ,n
1tatement 2o. $0, &/ccounting and "inancial 8eporting for *ertain (rants and Other
"inancial /ssistance,' the (/1B re+uires that on5behalf payments for wages and
benefits be accounted for by the recipient government as offsetting revenues and
e#penditures. -owever, nowhere does it address on5behalf payments for other goods
and services. %resumably if the (/1B wanted to treat other goods and services the
same as wages and benefits it would have done so. )herefore, there is no e#plicit
re+uirement that the government give any recognition to the on5behalf payments for
the rent. ,n fact in a dissenting opinion to 1tatement 2o. $0, two board members
wrote3
05$<
Granof and Khumawala 6e , Government and Not-for-Profit Accounting
,f the Board believes that on5behalf transactions are so significant as to ma=e the
total revenues and total e#penditures reported incomplete because they generally
are offset and thus have no effect on net results!, then all in5substance transactions
should be included within the scope of this 1tatement to provide a consistent
solution. Messrs. "reeman and Plasny point out that this proBect?s scope was
e#panded from fringe benefits to include salaries, and they see no reason that the
scope was not e#panded further so that a comprehensive answer would have been
reached. By limiting the scope of this 1tatement to the recognition of on5behalf
payments for fringe benefits and salaries, the Board is setting a precedent whose
nature and e#tent is +uestionable. Messrs. "reeman and Plasny believe that this
1tatement?s re+uirement for recognizing on5behalf payments for fringe benefits and
salaries is the &tip of the iceberg' if the Board determines thatto be fully
accountablestate and local government financial reporting should reflect the
total costs associated with the government, whether incurred by the reporting
government, another government federal, state, or local!, not5for5profit or profit5
see=ing organizations, or individuals.
05$>