Chapter 4
Objectives :
1. Review what modified accrual accounting is.
2. Review why governments use modified
accrual and full accrual.
3. Learn what exchange and non-exchange
transactions are
4. Learn how governments recognize revenue
Why Modified Accrual?
• Provides information about interperiod equity
• Whether the entity obtained and used its resources as
specified in the budget
Modified Accrual
Modified accrual accounts for expendable
financial resources, loosely interpreted as
current assets and current liabilities.
Revenue is recognized when measurable
and available.
Expenditures are recognized when the
goods or services are obtained.
Used for governmental fund statements only.
Measurable & Available
Since revenue is not “earned” some other
criteria must be used. Governments can
command resources or are granted resources
through programs. Therefore, availability
through assessment or grant is the key event.
No dollars can be recorded unless the amounts
can be reasonably estimated or measured.
So measurable and available are the criteria.
Transactions
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Exchange
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Where value is given
by both sides to the
transaction
Examples:
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Charges for services
Licenses
Fees
Permits
Inspection charges
In Proprietary funds
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Non-Exchange
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Imposed taxes
Derived tax revenues
Government
mandated
Voluntary
transactions
Can be constrained
by time or use
What types of revenue
• Property taxes
• Sales taxes
• Income taxes
• Donations
• Grants
• Restricted
• Shared
• Unrestricted
• Entitlements
• Gains/losses
• Interest and dividends
• Fees and licenses
• Fines
Property Taxes
Based on the value of the real estate within
a municipality’s boundaries. A mil rate,
established based on the budget, is assessed
against the value of real estate. The mil rate
times the assessed value equals the property
tax due. May be revisions for homeowners,
seniors, or because of negotiations with
businesses.
California Property Taxes
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CALIFORNIA
Capped at 1¼ % of
purchase price
Indexed for inflation
by no more than 2%
Values change on
change of ownership
Time Line
• Budget prepared
• Establish tax rate
• Allocated to individual properties/owners
• Billed and estimates of uncollectible taxes
• Collected
• Delinquent recognition
60 Day Rule
Because measurable is the criteria for recognition,
governments feel that monies collected within 60 days of the
end of the fiscal year are “available” in the current fiscal year.
Fiscal year end
60 days
___Taxes assessed________________________________________Some cash collected_______________
Revenue Recognized
Entries
Levied:
Property taxes receivable
1,000
Deferred Property tax revenue
985
Allowance for uncollectible
15
Deferred because at the time the taxes are levied
it is not apparent that the revenue will be
available in the current fiscal year.
Entries
Collect $750 of the $1,000 assessed:
Cash
Property Taxes Receivable
750
Deferred Property Tax revenue
Property Tax revenue
750
750
750
Entries, con’t
60 Day rule:
Deferred Property Tax revenue
175
Property Tax revenue
175
Note: Since the books usually aren’t closed
until 60 days after the end of the fiscal year,
municipalities know this number.
When collected:
Cash
175
Property Taxes Receivable
175
This leaves $75 as yet uncollected.
Entries
Reclassify as delinquent:
Property taxes receivable- delinquent 75
Property taxes receivable
75
Note: This isn’t necessarily
at the end of the fiscal year,
it could be just after the
taxes are finally due.
Entries, con’t
Collect delinquent:
Cash
15
Property Taxes-rec delinquent 15
Deferred property Tax
15
Property Tax revenue
15
Entries, Con’t
Collect after two months into new fiscal year:
Cash
10
Deferred property tax revenue 10
Property Taxes Rec. Delinquent
10
Property Tax revenue
10
Since this is after the 60 day rule, must
recognize the revenue.
Write Offs
Write Offs of property taxes use a similar process as
write offs under FASB rules:
Allowance for uncollectible
15
Property Taxes Receivable Delinquent
15
Sales Taxes
•Assessed on the value of goods and services
purchased
• Even though taxes may not be received until
the state receives and reallocates taxes, an entity
can recognize the revenue when the state has
the money but has not yet remitted to the
municipality.
Sales Taxes receivable
100
Sales tax revenue
100
Government-wide statements doesn’t have to meet “available” criterion
Income Taxes
• Similar recognition as sales taxes, 60 day
rule
• Estimate late collections based on historical
experience
• Make sure to recognize as revenue in the correct
year.
• For government-wide statements,
income taxes don’t have to meet
“available” criterion!
Grants
• Restricted
• Unrestricted
• Contingent
• Donations
• Entitlements
• Shared revenues
•PILOT
Unrestricted grants
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Unrestricted both time and purpose,
recognize when grant declared assuming
funds “available”
Unrestricted as to purpose but time
restriction,
Cash
10,000
Deferred revenue
10,000
Recognize revenue in time period to which
the grant is restricted.
Restricted Grants
• Restricted to a specific purpose
• Revenue not recognized until expended for
the purpose intended for the grant, called
“expenditure driven”
Grants in Special Revenue Fund
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Because the whole fund is restricted,
the government can recognize the
revenue when the grant is received
Cash
150,000
Grant Revenue
150,000
Entries Restricted Grants
Recognize grant to the extent it is spent when
cash received and committed:
Cash
350,000
Grant Receivable
50,000
Revenue from Grants
400,000
Entries, General Fund
If declared and not yet expended but will be:
Grant receivable
100,000
Deferred rev. from grant
100,000
Do not recognize as revenue until funds expended.
When expenditures take place:
Deferred grant revenue
100,000
Grant revenue
100,000
Cash Received First
Cash
50,000
Deferred Revenue
Expenditure
20,000
Cash
Deferred Revenue 20,000
Grant Revenue
50,000
20,000
20,000
Contingent Grants
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Grant contingent on entity doing something
Recognize grant to the extent that
contingency fulfilled.
Example:
“I’ll award $1 million if you collect a similar
amount”
As collections take place,
Grant receivable
500,000
Grant revenue
500,000
Donations
If donation of fixed assets for use:
No recognition except in schedule of assets
If asset will be held for sale:(GF)
Asset held for sale
10,000
Revenue from donation
10,000
When fixed assets sold: (GF)
Cash
7,500
OFS - sale of asset
7,500
Fund Balance
10,000
Asset held for sale
10,000
(On government-wide statements all fixed assets are
recognized and revenue would be recognized)
Entitlements
Items such as food stamps, Medicare.
Expenditure driven recognition, i.e. recognize
revenue at the same time as expenditure is
recognized.
Expenditures
10,000
Revenue
10,000
If “inventory” of entitlement items exists:
Inventory
5,000
Deferred revenue
5,000
Shared Revenues
Revenues collected by one level of government but shared
with another. An example, sales taxes, vehicle taxes
• Recognize when available
Payments in lieu of taxes
When a tax exempt entity pays an amount to another
instead of paying property taxes
An example would be when a foreign mission in
Los Angeles or San Francisco pays something to
the city. The foreign missions would be tax
exempt, so would not pay property taxes. This
reimburses the city for the services provided.
Sale of Fixed Assets
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Government fund
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Take off schedule of
fixed assets
No gains or losses in
governmental fund
Cash
5,000
OFS
5,000
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Government-wide
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Would report gains
and losses
Use FASB rules
Gains and Losses
• For Gov’ts investments are “marked to market”
• But do not follow the three categories of investments
(held for sale, trading, and held to maturity)
•Gains and losses, both realized and unrealized
are recognized and gains & losses are reported
on the statement of activities.
•For governments mark to fair value and recognize the
difference as an increase/decrease to the investment account
• Applies to both fund and government-wide statements
Interest and Dividends
• On long term investments, recognize increases
in value as a debit to the investment account
and a credit to increase in fair value
• On short term investments, amortize the
discount or premium and recognize as income.
Both methods increase fund balance by the
increase in value of the investments.
Same for both governmental and governmentwide funds.
Fines
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Recognition when
entity can legally claim
Because fines may be
protested, usually
means when paid or
judgment entered to
pay
Not available in current
year, then deferred
revenue
Government-wide
statements recognition
not subject to available
test
Fees and Licenses
• Exchange transaction
• Even if intended to cover several years or
the annual payment covers parts of two
fiscal years, the revenue is recognized when
the cash is received. This is because the
fees are usually not refundable.
• Government-wide statements
recognized over the period
of the license
Full Accrual Use for
Government-wide statements
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To achieve interperiod equity and
report on all economic resources,
government-wide statements use full
accrual
Includes long term assets
Includes long term debt
Recognizes depreciation
In general follows FASB rules.
Property Taxes Government-wide
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The “available” criterion doesn’t have
to be met
Recognize revenue at time of levy
Adjusted for uncollectibles
Subject to budget constraints
Review
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Know how governments recognize
different types of revenue
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Property Taxes
Sales taxes
Income taxes
Grants
Gains and Losses
Fees and Licenses
Fines