Chapter Four

Recognizing Revenues in Governmental Funds

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Thoughts to Ponder: Chapter 4

The thing generally raised on city land is taxes. Charles Dudley Warner
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For every benefit you receive a tax is levied. Ralph Waldo Emerson Taxes are the sinews of the state. Cicero

Learning Objectives
Current financial resources and the MA basis
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Economic resources and the full accrual basis

Distinction between the MA basis 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

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Entitys measurement focus: What is being reported upon?

Basis of Accounting: When transactions and other events are recognized?

Governmental Funds
Measurement Focus: flow of current financial resources (focus is on expendable financial resources)
o Revenues must be available to pay liabilities of current period
before they can be recognized. o Current financial resources include cash, receivables, marketable securities, prepaid items, and supplies inventories o Capital assets such as land, buildings, and equipment are NOT accounted for in governmental funds, but rather in governmental activities
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Basis: modified accrual accounting

EFFECT OF GASB #34

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Fund Statements vs. Government-wide Statements

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

1) Non-exchange Transactions 2) Exchange Transactions
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Classification of Revenues and Estimated Revenues

GASB Suggestion:
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1st classify by fund 2nd classify by source FUND

Sources include (but are not limited to):

S O U R C E

Taxes (Ad-valorem and self-assessing) o Special Assessments Licenses and Permits Charges for Services Fines and Forfeits Grants Intergovernmental Revenue o On-Behalf Payments Donations Miscellaneous Revenues o Sale of Capital Assets o Investments

S O U R C E FUND
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Example of Revenue Recognition in CAFR

The following note on revenues in the basic financial statements of the City of Louisville, Ohio illustrates the citys implementation of GASB Statement No. 33. Revenues - Exchange and Non-exchange TransactionsCity 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.

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1) 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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Two Types of Limitations on Nonexchange Transaction Revenue

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

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Four Categories of Nonexchange Transactions

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Derived tax revenues

Imposed nonexchange transactions

Governmentmandated nonexchange transactions

Voluntary nonexchange transactions

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

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(A) Derived Tax Revenues

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

Recognition Standards: 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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(B) Imposed Non-exchange Revenues

These are assessments imposed on individuals and business entities. The most prominent of these are property taxes and fines. o 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: o Fines & Forfeits

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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 (e.g., .96)

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Property Taxes (contd)

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) tax levy assessed valuation
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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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Property Taxes (contd)

Accounting for Property Tax Revenue (contd)

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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Assessed valuation is determined by an elected Tax Assessor

Property Taxes (contd)

Accounting for Property Tax Revenue: (contd)
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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
Taxes Receivable-Current Est. Uncollectible Current Taxes Revenues

Dr.
$1,000,000

Cr.
10,000 990,000

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Special Assessment Taxes

Special 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.

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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
o Refer to the example on pg. 144.
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(C) 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 accept and use the resources for a specific purpose.

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Recognition Standards
Government Mandated Transactions

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.

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Revenue from these transactions should be recognized when all eligibility requirements, including time requirements, have been met.

(D) Voluntary Non-exchange 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).
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Recognition Standards
Voluntary 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:
Pass-through grants On-behalf payments Restricted grant Unrestricted grant Contingent grant Entitlements Shared Revenues Payment in lieu of taxes
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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 151-153.
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Pass -Through Grants

Grants a government must transfer to, or spend on behalf of, a secondary recipient.

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.
o Example: State govt. receives the grant from the Fed. govt. to support special education programs. o Example: Food stamps.

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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 governmentwide financial stmts.

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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. 157.

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2) 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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Exchange vs. Non-exchange Transactions

In exchange transactions, a government provides goods or services to the provider in return for resources received. Examples Include:
o License and Permits o Charges for Services
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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?
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Characteristics of licenses:
o Exchange transactions: License fees which cover the cost of services provided. o Non-exchange transactions: License fees that bear little relation to the cost of services provided and imposed mainly as a source of general revenues. o License fees are generally non-refundable. o 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 nonexchange transactions, even though the party making the payment may receive less in value than it surrendered.

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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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Miscellaneous Revenues
Revenues that do not fall into one of the other categories. Examples: o Proceeds from the sale of government assets o 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 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 158. 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:
o Trading Securities fair value o Held-to-maturity o Available for sale fair value
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But for non-profits, FASB required that all debt and equity securities be stated at fair value. Gains and losses on investments both realized and unrealized must be recognized and reported in the statement of activities.

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Summary
Primary objectives of financial reporting:
o Interperiod equity and budgetary compliance.

2 types of financial statements are prepared:

o 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: o Imposed nonexchange transactions, ex. property taxes o Derived exchange transactions, ex. sales taxes o Government-mandated nonexchange transactions o Voluntary nonexchange transactions o Grants o Other exchange transactions, ex. sale of capital assets o Investments etc.

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