Revenue Accounting: Governmental Funds

1. Revenue Accounting:Governmental Funds Chapter 5

2. 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

3. 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

4. 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

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

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

7. 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

8. 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

9. 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

10. Recommended Classes of Revenues • Taxes • Licenses & permits • Intergovernmental revenues • Charges for services • Fines and forfeits • Miscellaneous

11. Types of Tax Revenues • Taxpayer assessed • Income taxes • Sales taxes • Levied – property taxes

12. 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

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

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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

20. Journal Entry to Record Billing Entry assumes gross billing of $100,000 with 5% estimated to be uncollectible and 3% estimated to be paid within discount period.

21. 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

22. Journal Entry to Record Collection [Page 185]

23. Taxes levied but not available [Page 186]

24. Taxes collected in advance and later earned [Page 187]

25. Discounts on Taxes [Page 187 – 188]

26. Discounts [continued]

27. 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

28. Recording interest & penalties [Page 189]

29. Accounting for Tax Sales [Page 189]

30. Accounting for Tax Sales [continued]

31. Accounting for Tax Sales [continued]

32. 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

33. Intergovernmental Revenues • Government-mandated nonexchange transactions • Voluntary nonexchange transactions

34. 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

35. 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

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

37. Entitlements – portions of appropriations allocated among governments based on relative populations (or some other measure) Shared revenues – varies in amount in each period (depending on collections) and allocated based on some formula or underlying transaction Entitlements & Shared Revenues

38. Intergovernmental Revenue Accounting (IGR) Issues • Fund Identification • Pass-Through Grants • Revenue Recognition

39. 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

40. 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

41. 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

42. 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

43. 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

44. Grant received before earned [Page 194 – 195]

45. Grant earned before received before earned [Page 195]

46. 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

47. Special Assessments • Service provided in one year, collection made in subsequent years • Expenditures recognized for service • Revenue deferred until collection

48. Special Assessments[Page 197]

49. Special Assessments[continued]

50. Fines & Forfeits • Usually not that big of a source of revenue • Revenue usually recognized on a cash basis • Large fines might be accrued