Chapter 4
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
For every benefit you receive a tax is levied.
Ralph Waldo Emerson
Taxes are the sinews of the state.
Cicero
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Learning Objectives
 Current financial resources and the Modified
Accrual (MA) basis
 Economic resources and the full accrual
basis
 Distinction between the MA basis and full
accrual basis of accounting
 Distinction between exchange and nonexchange transactions
 Main types of non-exchange transactions
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Measurement Focus and Basis of
Accounting
 Entity’s measurement focus:
What is being reported upon?
 Basis of Accounting: When
transactions and other events
are recognized?
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Governmental Funds
 Measurement Focus: flow of current financial
resources (focus is on expendable financial
resources)
--Revenues must be available to pay liabilities of
current period before they can be recognized.
--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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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:
 1st classify by fund
 2nd classify by source
FUND
S
O
U
R
C
E
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Sources include (but are not limited to):
 Taxes (Ad-valorem and self-assessing)
 Special Assessments
 Licenses and Permits
 Charges for Services
 Fines and Forfeits
 Grants
 Intergovernmental Revenue
--On-Behalf Payments
 Donations
 Miscellaneous Revenues
--Sale of Capital Assets
--Investments
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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 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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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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Non-exchange Transactions
Four Categories of Nonexchange Transactions
A) Derived tax revenues
B) Imposed nonexchange transactions
C) Government-mandated nonexchange
transactions
D) 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.
 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:
 Fines & Forfeits
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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.
Ad valorem taxes are those that are paid according
to the value of underlying property– (e.g. personal
and real property taxes.)
Property taxes would normally be recognized as
revenue during the period for which they were levied.
Revenue is recognized ONLY if cash is expected to
be collected within 60 days of year end. (i.e.
available)
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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 (cont’d)
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
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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Special Assessment Taxes


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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
Refer to the example on pg. 141.
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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
 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).
If the grant is a reimbursement grant, then
recognize when qualifying expenditures have been
made by the recipient organization.
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(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 Nonexchange 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 nonexchange
transaction or voluntary nonexchange transaction

Intergovernmental Revenue Include:
 Pass-through grants
 On-behalf payments
 Restricted grant
 Unrestricted grant
 Contingent grant
 Entitlements
 Shared Revenues
 Payment in lieu of taxes

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 149-151.
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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-through’
grants should be recognized as (intergovernmental)
revenue and expenditures/expenses in governmental,
proprietary or trust funds of the primary government
and in the government–wide financial stmts.
 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.
 Example: State govt. receives the grant from the Fed. govt. to
support special education programs.
 Example: Food stamps.
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On-Behalf Payments
When one government makes payment for
employment fringe benefits ‘on behalf’ of
another government’s employees, the
employer government is required to disclose
in the notes to its financial statements the
related amounts.
You can also refer to the complete example
and journal entries on pg. 155.
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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:
License and Permits
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?

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.
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:


Proceeds from the sale of government assets
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 156.
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
 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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