Revenue Recognition
Presented by Frank Leonard
May 18, 2006
Revenue Recognition
Objectives

To provide an understanding of the criteria
used to recognize revenue

To improve consistency in communication
regarding revenue

To empower all staff to speak with authority
about GFOA requirements for revenue
recognition
Revenue Recognition
Terminology
NCGAS – National Council on Governmental
Accounting Standards
GASB – Government Accounting Standards
Board
GFOA – Governmental Finance Officer’s
Association
GAAFR – Governmental Accounting, Auditing,
and Financial Reporting Guide
(aka “The Blue Book”)
Revenue Recognition
Terminology (continued)
Available –
physically present during the fiscal
period in question
Availability Period - the extension of the definition of
“Available” to include months beyond the fiscal period.
In the County, the Availability Period has historically
been 12 months. It now has been changed to 3 months.
Revenue Recognition
Revenue Recognition
Generally accepted accounting principles,
(GAAP), direct that governmental funds
recognize revenues “in the accounting period
in which they become susceptible to accrualthat is, when they become both measurable and
available to finance expenditures of the fiscal
period.”
NCGAS 1 paragraph 62
Recommended reading: 2005 GAAFR, pgs. 71-80
Revenue Recognition
Revenue Recognition
In other words, governmental funds recognize
revenue when:
1)The cash is in the bank and
2)The cash received is permitted to be used to
pay the current year’s bills.
Revenue Recognition
GFOA comments
“GFOA recognizes that governments
in some situations may wish to
extend their regular availability
period in connection with
expenditure driven grants. “
“…the use of a 12 month availability period for
any revenue source is discouraged …“
Revenue Recognition
Revenue Recognition Criteria
Accrual vs. Modified Accrual
Accrual
Proceeds must be earned before it can be recognized.
However, proceeds do not have to be available before
revenue is recognized. Proprietary Funds
Modified Accrual
Proceeds must be earned and available, (which includes
being eligible). General Fund, Special Revenue,
Capital Project, and Debt Service Funds
Revenue Recognition
Revenue Recognition Criteria
Eligibility requirements:
Time restrictions
(received in advance for FY2008)
Allowable cost restrictions
(Expenditure-driven Reimbursements - Claiming)
Required characteristics of recipient
(i.e., must be federal, school, etc.)
Contingencies (In the event that….)
Note: Neither purpose restrictions nor receipt of cash, are
used to establish eligibility !
Revenue Recognition
Deferred Revenue
Unearned vs. Deferred
Unearned
When cash is received in advance of revenue
entitlement, (Unearned/Available)
Deferred
When cash is received subsequent to revenue
entitlement. (Earned/Unavailable)
Revenue Recognition
Journal Entry when Proceeds Received
in Advance of Revenue Entitlement
1. To receipt cash received in advance of revenue recognition criteria being met:
Account
Debit
Cash (101100)
Deferred Revenue (230XXX)
(Unearned)
100
Credit
100
2. To recognize revenue once revenue recognition criteria has been met:
Account
Debit
Credit
Deferred Revenue (230XXX)
100
Revenue (7XXXXX)
100
Revenue Recognition
Journal Entry when Proceeds Received
Subsequent to Revenue Entitlement
Once revenue has been earned, a receivable and offsetting deferred revenue should be
entered. If these amounts remain at year-end, it is considered “Unavailable.” These
amounts should be identified using Schedule S-9 or S-12.
Account
Debit
Credit
Receivable (11XXXX)
100
Deferred Revenue
(230XXX)
100
1.
2.
Once proceeds are received, the entry should be reversed and the revenue
should be recognized. Delaying the recognition of revenue until cash is
received is a modified accrual concept for use with governmental funds only.
Account
Debit
Credit
Cash (101100)
100
Receivable (11XXXX)
100
Deferred Revenue (230XXX)
100
Revenue (7XXXXX)
100
Revenue Recognition
Review Scenarios
Revenue Recognition
Scenario 1
A. Department receives $1,000,000 advance for funding program.
This is not considered an "Expenditure Driven" or
"Reimbursement" type grant; however an approved claim is
required for legal entitlement to resources.
B. Department has submitted $600,000 in claims that took
approximately 4 months to receive approval from grantor.
Upon approval, revenue is recognized (converted from
deferred revenue to revenue)
C. On June 15th, Department submits to grantor another $300,000
RESULT
At year end, this amount ($300,000) would not be accrued as revenue
because it is not expected to be received within 90 days of FYE
Revenue Recognition
Scenario 2
A. Department receives $1,000,000 advance for funding program.
This is not considered an "Expenditure Driven" or
"Reimbursement" type grant ; however an approved claim is
required for legal entitlement to resources.
B. Department has submitted $600,000 in claims that took
approximately 2 months to receive approval from grantor.
Upon approval, revenue is recognized (converted from
deferred revenue to revenue)
C. On June 15th, Department submits to grantor another $300,000
RESULT
At year end, this amount ($300,000) would be accrued as revenue
because it is expected to be received within 90 days of FYE
Revenue Recognition
Scenario 3
A. Department receives $1,000,000 advance for funding program. This
is not considered an "Expenditure Driven" or "Reimbursement"
type grant; however an approved claim is required for legal
entitlement to resources.
B. Department has submitted $1,000,000 in claims that took
approximately 6 months to receive approval from grantor. Upon
approval, revenue is recognized (converted from deferred revenue
to revenue)
C. The grant guarantees reimbursement for all valid grant related
expenditures.
D. On June 15th, Department submits to grantor another $300,000
RESULT
At year end, this amount ($300,000) would be accrued as revenue.
This additional $300,000 would be treated as if it were a separate
"Expenditure Driven" or "Reimbursement" type grant and thus a
12 month accrual period.
Revenue Recognition
Revenue Recognition
Contacts
Frank Leonard 5-3877