Revenue Accounting: Governmental Funds

Chapter 5 Learning Objectives

. Determine when to recognize and report various revenues . Identify categories of nonexchange revenues and when to recognize assets and revenues . Discuss and apply modified accrual revenue recognition criteria to simple and complex situations . Understand accounting for levy, collection, and enforcement of property taxes and other tax revenues . Account for investment income . Distinguish and account for intergovernmental revenues . Understand classification and accounting for other types of revenues & other financing sources . Account for and report changes in revenue accounting principles and error corrections Revenues in governmental funds

Increases in net assets of a governmental fund that either: . Result in a corresponding increase in net assets of governmental entity as a whole . Result from exchange-like interfund services provided Revenues: Operational Definition

All increases in fund net assets except those arising from . Interfund reimbursements . Interfund transfers . Sale (or compensation for loss) of capital assets . Long-term debt issues Nonexchange Transactions

. Governed by GASBS #33 . 4 classifications of transactions Nonexchange Transactions

. Governed by GASBS #33 . 4 classifications of transactions . Derived tax revenues . Imposed tax revenues . Government-mandated transaction . Voluntary transaction Nonexchange Transactions

. Governed by GASBS #33 . 4 classifications of transactions . May have significant deferred revenues due to timing of recognizing asset and revenue from transaction . Revenues recognition requires entity to meet both . Asset recognition criteria or received cash . Revenue recognition criteria Modified Accrual Revenue Recognition . Recognize only revenues susceptible to accrual – others on a cash basis . Requirements for susceptible to accrual . Objectively measurable . Legally available (usable) to finance current period expenditures Establishing legal claim to revenues . Charges for services – performing the service . Taxes – levy establishes claims to resources . Sales taxes – business making a taxable sale . Income taxes – taxpayer earning taxable wages Recommended Classes of Revenues . Taxes . Licenses & permits . Intergovernmental revenues . Charges for services . Fines and forfeits . Miscellaneous Types of Tax Revenues

. Taxpayer assessed . Income taxes . Sales taxes . Levied – property taxes Taxpayer assessed taxes

. Must assure that tax base has been accurately reported by taxpayer – may be very difficult to do . Should be recognized when susceptible to accrual . When underlying transaction takes place . In practice, usually recognized when collected . Revenue from tax stamps usually recognized when stamps are sold Administering property taxes

1. Tax assessor determines assessed value of property 2. Local assessment review board hears complaints about assessments 3. Boards of equalization assign values to taxing districts 4. Legislative body levies amount of tax needed to cover expenditures 5. Tax levy distributed among taxpayers based on assessed value 6. Taxpayers are billed 7. Tax collections are credited to taxpayers’ accounts 8. Collects enforced by penalties, interest, & sale of property for taxes 1. Assessment of Property

. Valuing property for tax purposes . Properties of other governments & religious organizations exempt from tax . Several governments may tax same property – overlapping jurisdictions

No journal entries required at this point. 2. Review of Assessment

. Performed by local board . May adjust individual assessments . Taxpayers can still appeal in courts

No journal entries required at this point. 3. Equalization of Assessments

. Assessments made by a number of different assessors . Equalization board attempts to make sure multiple properties are taxed at the same percentage of fair value

No journal entries required at this point. 4. Levying the Tax

. Levy made through ordinance . Levies may vary in level of restrictions as to use or purpose of tax . Determining tax rate – divide levy by total assessed valuation – resulting percentage is rate or mills per dollar

No journal entries required at this point. 5. Distribution of Levy to Taxpayers Amount due from each taxpayer is determined by multiplying rate times assessed value of property

No journal entries required at this point. 6. Taxpayers are billed . Amount owed by each taxpayer entered into Tax Roll . Taxes recorded in the accounts . Receivable is for gross levy . Adjustments made for . Allowance for uncollectible accounts . Discounts on taxes Journal Entry to Record Billing

Taxes Receivable – Current 100,000 Allowance for Uncollectible Taxes – Current 5,000 Allowance for Discounts 3,000 Revenues 92,000

Entry assumes gross billing of $100,000 with 5% estimated to be uncollectible and 3% estimated to be paid within discount period. 7. Recording Tax Collections

. Must keep track of which year’s taxes were collected – current and delinquent . Taxes may be levied but not available . Levied for next year’s operations . Will not be collected in time to be available . Taxes collected in advance – reported as deferred revenue at time of collection Journal Entry to Record Collection [Page 185]

Cash 90,000 Taxes Receivable – Current 70,000 Taxes Receivable – Delinquent 20,000 Taxes levied but not available [Page 186]

Levy Taxes Receivable – Current 100,000 Allowance for Uncollectible Current Taxes 3,000 Deferred Revenues 97,000

Revenues becomes available Deferred Revenues 97,000 Revenues 97,000 Taxes collected in advance and later earned [Page 187]

Advance collection Cash 2,500 Taxes Collected in Advance 2,500

Apply collection to receivable Taxes Collected in Advance 2,500 Taxes Receivable – Current 2,500 Discounts on Taxes [Page 187 – 188]

Taxes Receivable – Current 300,000 Allowance for Uncollectible Current Taxes 9,000 Allowance for Discounts on Taxes 2,000 Revenues 289,000 Discounts [continued]

Collection within discount period Cash 150,000 Allowance for Discounts on Taxes 1,500 Taxes Receivable – Current 151,500

Discount period expires Allowance for Discounts on Taxes 500 Revenues 500 8. Enforcing Tax Collections

. Interest and penalties – assessed for late payment of taxes – subject to availability requirement . Tax sales . Lien receivable created from taxes receivable, interest and penalties, & court costs . Allowances also converted . Sales price > than receivable, difference goes to taxpayer . Sales price < than receivable, charge allowance account Recording interest & penalties [Page 189]

Interest & Penalties Receivable – Delinquent Taxes 15,000 Allowance for Uncollectible Interest & Penalties 1,000 Revenues 14,000 Accounting for Tax Sales [Page 189]

Reclassify assets to lien Tax Liens Receivable 28,000 Taxes Receivable – Delinquent 25,000 Interest & Penalties Receivable – Delinquent Taxes 3,000

Add court costs Tax Liens Receivable 1,000 Cash 1,000 Accounting for Tax Sales [continued]

Reclassify allowances Allowance for Uncollectible Delinquent Taxes 2,000 Allowance for Uncollectible Interest & Penalties 100 Allowance for Uncollectible Tax Liens 2,100 Accounting for Tax Sales [continued]

Government keeps property [page 190] Expenditures 4,000 Allowance for Uncollectible Tax Liens 2,000 Tax Liens Receivable 6,000

Record related revenue Deferred Revenues 4,000 Revenues 4,000 Licenses and Permits

. Categories . Business – alcoholic beverages, health, corporations, utilities, professional, occupational, and amusements . Nonbusiness – building, vehicles, driver licenses, hunting & fishing, marriage, burial, & animal . Rates established by ordinance and adjusted periodically Intergovernmental Revenues

. Government-mandated nonexchange transactions . Voluntary nonexchange transactions Government-mandated Nonexchange Transactions . Government at one level . Provides resources to government at another level, and . Requires recipient to use them for a specific purpose . Provider government establishes purpose restrictions and may set time requirements and other eligibility requirements Voluntary Nonexchange Transactions . Legislative or contractual agreements between two or more willing parties . Examples: grants, certain entitlements, and donations . Parties not limited to governments but includes individuals . Provider may establish purpose restrictions and eligibility requirements and may require return of resources if requirements not met Types of Grants

Capital Grants Operating Grants . Solely for capital . All other grants purposes . Examples . Example – operation . Airport improvements of social welfare . Buses programs . Subway systems . Wastewater treatment plants Entitlements & Shared Revenues

Entitlements – portions of Shared revenues – appropriations varies in amount in allocated among each period governments based on (depending on relative populations (or collections) and some other measure) allocated based on some formula or underlying transaction Intergovernmental Revenue Accounting (IGR) Issues

. Fund Identification . Pass-Through Grants . Revenue Recognition Fund Identification

. Not always necessary to establish a separate fund for grants . Use GF whenever possible . Use SRF only if legally mandated . Resources for debt principal/interest payment should be in DSF . Use CPF for grants restricted for capital acquisition/construction . Grants for EFs or ISFs should be accounted for in those funds Pass-Through Grants

. Primary recipient (entity that first receives the money) uses grant to support some other program . Primary recipient must pass grant along to intended user (subrecipient) – cannot use for own purposes . Subrecipient uses grant for intended purpose – or passes along to sub-subrecipient Pass-Through Grants

. Primary recipient generally accounts for grant as revenue upon receipt and expenditure/expense when distributed . Primary recipient may use Agency Fund only if it acts as cash conduit – no administrative or financial involvement with grant Revenue Recognition

. Unrestricted IGR recognized as revenues immediately, if available . Restricted IGR not recognized until all eligibility requirements are met: generally must be expended for allowable costs to meet requirements – known as “expenditure-driven” grant IGR recognition

. If grant received before earned, recognize asset (Cash), but defer revenue until earned . If grant earned before received, recognize asset (receivable) and revenue, if considered available Grant received before earned [Page 194 – 195] Grant received Cash 100,000 Deferred Revenue 100,000

Qualifying expenditures Expenditures 40,000 Vouchers Payable 40,000

Recognize revenue Deferred Revenue 40,000 Revenue 40,000 Grant earned before received before earned [Page 195] Qualifying expenditures Expenditures 75,000 Vouchers Payable 75,000

Recognize revenue Deferred Revenue 75,000 Revenue 75,000 Charges for Services

. Result from goods and services provided to public, other departments or other governments . When dealing with other departments, must distinguish between reimbursements and interfund service transactions . Recognize revenue when service is provided (earned), if available, or when cash is collected Special Assessments

. Service provided in one year, collection made in subsequent years . Expenditures recognized for service . Revenue deferred until collection Special Assessments [Page 197]

Work done in current period Expenditures 100,000 Vouchers Payable 100,000 Revenue postponed until collection Accounts Receivable – Deferred Deferred Revenues 100,000 100,000 Special Assessments [continued]

Annual payment comes due Accounts Receivable – Current 20,000 Accounts Receivable – Deferred 20,000 Revenue recognized Deferred Revenues 20,000 Revenues 20,000 Interest billed on entire amount Interest Receivable 6,000 Revenues – Interest 6,000 Fines & Forfeits

. Usually not that big of a source of revenue . Revenue usually recognized on a cash basis . Large fines might be accrued Investment Earnings

. GASBS #31 sets reporting requirements for fair value . GASBS #31 did for investments what FASBS #115 did in the private sector – only the GASB rules are much easier . GASBS #31 identified types of investments to adjust to fair value Investments carried at cost

. Nonparticipating investment contracts (fixed-rate CDs) . Equity securities, option contracts, stock warrants, and stock rights without readily determinable fair values Investments carried at fair value or cost

. Participating interest-earning, investment contracts (variable-rate CDs) purchased one year or less before maturity . Money market investments purchased one year or less before maturity Investments carried at fair value

. Participating interest-earning, investment contracts (variable-rate CDs) purchased more than one year before maturity . Money market investments purchased more than one year before maturity . Investment positions in external investment pools (except 2a7-like pools) Investments carried at fair value [continued]

. Open-end mutual funds . Equity securities, option contracts, stock warrants, and stock rights with readily determinable fair values . Debt securities Essential Elements of Fair Value Accounting for Investments

. Investments are carried at fair value . Premiums & discounts on investments need not be amortized, unless using amortized cost . Fair value accounting not used for investments accounted for using equity method Reporting Interest Income and Changes in Fair Value . Investment income = cash interest and dividends received or accrued realized gains (losses) changes in fair value of investments . Investment income may be reported on single line or broken into components: . Interest and dividends . Net increase (decrease) in fair value of investments [wording required by GASB] . Realized & unrealized gains & losses should not be reported separately in statements but may be disclosed in the notes Investment entries [Page 200]

Investment (same for A & B) Investments 496,000 Cash 496,000 Interest received (same for A & B) Cash 30,000 Revenues – Interest 30,000 Investment entries [continued] Amortized cost – A Change in fair value No Entry

Amortize discount on investment Investments 2,000 Revenues – Interest 2,000 Fair value – B – change in fair value Investments 1,000 Revenues – Increase in Fair Value of Investments 1,000 Miscellaneous Revenues

. Escheats . Private Contributions Escheats

. State law indicates when property of people dying intestate, inactive checking & other accounts, or other property must pass to the state . Property so received is a revenue to the state . Capital assets should be recorded in General Capital Assets at fair value Private Contributions

. Rare, but it does occur . Unrestricted donations are revenue in the General Fund . Restricted donations . For the benefit of the government are revenues in SRF, CPF or Permanent Fund . For the benefit of others are revenues in a Private Purpose Trust Fund . Property received via contributions is recorded at fair value Selected Nonrevenue Fund Balance Increases . Capital Asset Sales / Losses . Internal PILOTs . Collateralized borrowings Capital Asset Sales/Losses

. Gains & losses on sales of capital assets not reported in governmental fund statements – would violate MFBA . Net proceeds from sales reported as an Other Financing Source . For GCA, report proceeds in GF or SRF; for EF or ISF assets, report in the appropriate fund Payments in Lieu of Tax (PILOTs)

. External – Payment from one government to another because payor does not pay taxes . Recognized as miscellaneous revenue . Federal government major payor . Internal – Payments within government’s funds . May qualify as PILOT if payor receives something in return – otherwise it is a transfer . Probably should be called interfund service transaction Collateralized Borrowings

GASBS #48 provides criteria for treating transfers of receivable as a sale . If criteria met, proceeds of sale reported on operating statement . If criteria not met, transaction is a borrowing . Fund liability – balance sheet transaction . Not fund liability – proceeds reported as OFS Changes in Accounting Principles Two types . Prospective – affects only current and subsequent years . Retroactive – requires restatement of prior years or computation of cumulative effect Common Causes of Changes

. Management decides to change from one acceptable method of accounting to another acceptable method (not common) . Change in circumstances (state) requires change in method of applying acceptable principle . GASB issues new standard that requires change in revenue recognition Standard Practices

. Change is effective at beginning of the year of the change . Cumulative effect [if any] is reported as a restatement of beginning fund balance . Revenues reported under new policy for each year presented . Change is disclosed and explained in the notes to the financial statements Error Correction

3 step process 1. Recognize the erroneous entry that was recorded 2. Determine what the correct entry should be 3. Fix the error by essentially combining steps 1 & 2 Error Correction Issues

. If error is caught in same year, fairly simple process to reverse it and record correction . If error was made in a previous year, must consider if accounts affected have been closed – may result in a “Correction of Prior Year Error” Error Correction Example – 1

Identify the error: government accountant incorrectly calculated interest to be accrued – amount recorded was $75; it should have been $100.

Interest Receivable 75 Revenues – Interest 75 Error Correction Example – 2

Correct entry is fairly straight-forward

Interest Receivable 100 Revenues – Interest 100 Error Correction Example – 3

Correction will depend on which year the original error occurred:

Current year – just add another $25 Interest Receivable 25 Revenue – Interest 25 Previous year – Revenue account closed Interest Receivable 25 Correction of Prior Year Error 25