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Recognizing Revenues in
Governmental Funds
1
LEARNING OBJECTIVES
After studying Chapter 4, you should be able to :
Understand current financial resources and the MA basis
Understand economic resources and the full accrual basis
Explain distinction between the MA basis and full accrual basis of
accounting
Identify difference between exchange and non-exchange
transactions
Identify main types of non-exchange transactions
Financial Statements
Two types of financial statements:
Governmental Fund financial statements
o Basis of Accounting: Modified accrual basis
o Provides information relating to Inter-period equity
Chapter 5
Government-wide F.S.
o Basis of Accounting: Full accrual basis
3
Measurement Focus and Basis of
Accounting
5
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.
Available:
60 day rule has become the benchmark. But some governments have
also established 30, 90 days or 1 year time periods.
Imposed non-
Derived tax
exchange
revenues
transactions
Government-
Voluntary non-
mandated non-
exchange
exchange
transactions
transactions
7
(A) Derived Tax Revenues
Derived (non-exchange) tax revenues represent
taxes imposed on or derived from exchange
transactions, such as commercial sales (sales
taxes), taxpayer income (income taxes), etc.
8
(A) Derived Tax Revenues- Examples
Sales tax:
In December 2014 merchants collect $20 million in sales
taxes. Of these, $12 million are collected prior to
December 15 and must be remitted by February 15, 2015;
the remaining $8 million must be remitted by March 15,
2015. Journal entry to record the sales tax:
Governmental fund:
DR CR
Government-wide:
9
(A) Derived Tax Revenues- Examples
Sales tax collected by another government: In November and
December 2014, merchants collect $20 million in sales taxes. Of
these, $5 million is remitted to the state as due by December 15,
2014; the remaining $15 million is due on January 15, 2015. The
state remits the taxes to the city 30 days after it receives them.
Journal entry to record the transaction:
Governmental fund:
DR CR
Government-wide:
10
(A) Derived Tax Revenues- Examples
Income Taxes:
In its scal year ending June 30, 2014, the state collects $95 billion in income
taxes for the calendar years 2013 and 2014. It refunds $15 billion of taxes based
on the returns led by April 15, 2014. As the result of audits of prior-year
returns, the state bills taxpayers $10 billion for earlier calendar years; it collects
$7 billion of this before its scal year-end and expects to eventually collect the
entire remaining $3 billion. Journal entry to record the transaction:
Governmental fund:
DR CR
Government-wide:
11
(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
12
Property Taxes
Governmental fund:
DR CR
Cash $130,000
Parking tickets receivable (not protested) 66,000
Revenue from parking nes $130,000
Parking nes (deferred inow of resources) 18,000
Allowance for uncollectible parking tickets 48,000
To summarize 2014 activity related to November tickets
Government-Wide
Cash $130,000
Parking tickets receivable (not protested) 66,000
Revenue from parking nes $148,000
Allowance for uncollectible parking tickets 48,000
To summarize 2014 activity related to November tickets
(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.
Recognition Standards
Government Mandated Transactions
Revenue from these transactions should be recognized
when all eligibility requirements, including time
requirements, have been met.
Example: Mandatory drug and alcohol abuse prevention
program for the schools (The DARE program in public
schools).
DR CR
Cash $15
state grant 15
To record the receipt of state funds in 2014
State grant (deferred inflow of resources)$15
grant revenue 15
To recognize grant revenue in 2015
29
Grant with Purpose Restriction
In October 2014 a school district is notied that, per legislatively
approved formulas, the state granted it $15 million to enhance its
technological capabilities. The funds, transmitted by the state in
December 2014, must be used to acquire computers but may be spent at
any time. (specific purpose and not specified time, so purpose
restrictions)- so specified immediately when announcement made
DR CR
Cash 15
grant revenue 15
30
Reimbursement (Eligibility Requirement)
Grant
In December 2014 a city is awarded a grant of $400,000 to train
social workers. During December 2014 it spends $300,000 in
allowable costs, for which it is reimbursed $250,000. It expects to
be reimbursed for the $50,000 balance in January 2015, and to
expend and be reimbursed for the remaining $100,000 of its grant
throughout 2015. The city is subject to an eligibility requirement in
that to be eligible for the grant it must rst incur allowable costs.
Expenditures to train social workers $300,000
Cash (or payables) $300,000
To record allowable costs
Cash $250,000
31
Grants receivable 50,000
Grant revenue $300,000
To recognize grant revenue
Unrestricted Grant with Contingency
Eligibility Requirement
In January 2014, a private foundation agrees to match
all private cash contributions up to $20 million received
by a state-owned museum during its 20142015 fund
drive. In 2014 the museum receives $14 million in
private cash contributions.
32
Donations of Land for Differing
Purposes
A builder donates two parcels of land to a city. Each has a
fair value of $4 million. The city intends to use one as a park
and to sell the other.
39
Miscellaneous Revenues
Revenues that do not fall into one of the other
categories.
Examples:
oProceeds from the sale of government assets
oInvestment income
But for non-profits, FASB required that all debt and equity securities be
stated at fair value.
Investments $55
Revenueincrease in fair value of investments $55
To record the increase in the fair value of the investments
INTEREST AND DIVIDENDS
On December 1, a town purchased a $1,000, two-year discount note
for $873, a price that reects an annual yield of approximately 7
percent. As a discount note, the security provides no periodic
payments of interest. However, assuming no change in prevailing
interest rates or other factors that would also affect fair value, the
notes fair value can be expected to increase by approximately $5
the rst month. On December 31, if the fair value of the note were
$878, the following entry would recognize the $5 of investment
income attributable in economic substance to the interest earned:
Investments $5
Revenueincrease in fair value of investments $5
To record the increase in the fair value of the investments
INTEREST AND DIVIDENDS
If the security were a short-term Treasury note (one year or less), the
government would not look to fair value to adjust the security.
Instead, it would amortize the initial discount over the life of the
note. If the initial discount on a six-month, 6 percent, $1,000 note
were $30, the following entry would recognize one months interest
income: