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Chapter 4

Recognizing Revenues in
Governmental Funds

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Chapter Four

Thoughts to Ponder: Chapter 4

Taxes are the sinews of the state.


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For every benefit you receive a tax is levied.

Ralph Waldo Emerson

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The thing generally raised on city land is taxes.

Charles Dudley Warner

Learning Objectives

Main types of non-exchange transactions

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Economic resources and the full accrual basis

Distinction between the MA basis and full accrual
basis of accounting
Differentiate between exchange and non-exchange

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Current financial resources and the MA basis

Entitys measurement focus: What is being

reported upon?
Basis of Accounting: When transactions and
other events are recognized?

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Measurement Focus and Basis of


Governmental Funds
Measurement Focus: flow of current financial

o Revenues must be available to pay liabilities of current period

before they can be recognized.
o Current financial resources include cash, receivables,
marketable securities, prepaid items, and supplies inventories
o Capital assets such as land, buildings, and equipment are NOT
accounted for in governmental funds, but rather in

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resources (focus is on expendable financial resources)

governmental activities

Basis: modified accrual accounting

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Fund Statements
vs. Government-wide Statements

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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.
60 day rule has become the benchmark. But some governments
have also established 30, 90 days or 1 year time periods.

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Revenue Recognition

Two broad types of Transactions

1) Non-exchange Transactions
2) Exchange Transactions

Classification of Revenues and

Estimated Revenues
1st classify by fund
2nd classify by source
Sources include (but are not limited to):


Taxes (Ad-valorem and self-assessing)

o Special Assessments
Licenses and Permits
Charges for Services
Fines and Forfeits
Intergovernmental Revenue
o On-Behalf Payments
Miscellaneous Revenues
o Sale of Capital Assets
o Investments

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GASB Suggestion:

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The following note on revenues in the basic financial

statements of the City of Louisville, Ohio illustrates the citys
implementation of GASB Statement No. 33.
Revenues - Exchange and Non-exchange TransactionsCity of Louisville, Ohio
Revenue resulting from exchange transactions, in which each
party gives and receives essentially equal value, is recorded
on the accrual basis when the exchange takes place. On a
modified accrual basis, revenue is recorded in the fiscal year
in which the resources are measurable and become
available. Available means that the resources will be
collected within the current fiscal year or are expected to be
collected soon enough thereafter to be used to pay liabilities
of the current fiscal year. For the City, available means
expected to be received within sixty days of year-end.

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Example of Revenue Recognition in CAFR


External events in which a government gives/receives

value without directly receiving/giving equal value in
Revenue recognition depends on time requirements
- the period in which the resources are required (or
may be) used
Some non-exchange 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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1) Non-exchange Transactions


Two Types of Limitations on Nonexchange Transaction Revenue

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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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Time Requirements. These specify the period in which

resources must be used or when use must begin (e.g.
property taxes; certain grants).


Derived tax

Imposed nonexchange

Governmentmandated nonexchange

Voluntary nonexchange

Standards for the last 2 transactions apply to both

revenues and expenditures.

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Four Categories of Nonexchange



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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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.

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(A) Derived Tax Revenues


These are assessments imposed on individuals and

business entities.
The most prominent of these are property taxes and
o Property tax: It is the bread and butter of local
Classified as Ad-Valorem taxes (based on value), property
taxes are most typically levied against real property.
Special Assessment Special kind of Property Tax

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(B) Imposed Non-exchange Revenues

Other types include:

o Fines & Forfeits

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
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


Property Taxes (contd)

Required tax rate (per $100 or per

$1,000 of assessed valuation)

tax levy
assessed valuation

Statutory or legislatively
* assessed valuation of taxable
approved tax rate property (either real property or
personal property)
Another calculation:
Revenues required
Estimated collectible proportion

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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.


Property Taxes (contd)

Assessed valuation is determined by an elected Tax

Estimated True Value * Assessment Ratio
In some jurisdictions the assessment ratio is 1.00 (i.e.,
full estimated market value), other jurisdictions it
might be .30 or some other fraction of full value.

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Accounting for Property Tax Revenue (contd)


Property Taxes (contd)

Assume Revenues of $990,000 are required and it is
estimated that 1% will be uncollectible:
Levy = $990,000/.99 = $1,000,000.
(ignore subsidiary ledger entry)
GF General Journal
Taxes Receivable-Current
Est. Uncollectible Current Taxes


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Accounting for Property Tax Revenue: (contd)


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

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Special Assessment Taxes


Fines and Forfeits

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
o Refer to the example on pg. 144.

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Fines are amounts assessed by the courts against those

guilty of statutory offenses and neglect of official duties.


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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(C) Government-mandated Transactions


Recognition Standards
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

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Government Mandated 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

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(D) Voluntary Non-exchange



Recognition Standards
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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Voluntary Non-exchange Transactions


Intergovernmental Revenue
May be either government-mandated non-exchange transaction or
voluntary non-exchange transaction

Pass-through grants
On-behalf payments
Restricted grant
Unrestricted grant
Contingent grant
Shared Revenues
Payment in lieu of taxes

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Intergovernmental Revenue Include:

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 151-153.


Pass -Through Grants

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 governmentwide
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.
o Example: State govt. receives the grant from the Fed. govt. to
support special education programs.
o Example: Food stamps.

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Grants a government must transfer to, or spend on behalf of, a

secondary recipient.


One government makes payment for

employment fringe benefits on behalf of

You can also refer to the complete example

and journal entries on pg. 157.

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On-Behalf Payments


Transactions in which each party receives value

essentially equal to the value given
e.g. one party sells goods or services and the other
Recognize the revenue when it is earned, and the
expense/expenditure when it is incurred.

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2) Exchange Transactions

Exchange-like transactions are those in which the

values exchanged may be related but not quite equal.

In exchange transactions, a government provides

goods or services to the provider in return for
resources received.
Examples Include:
o License and Permits
o Charges for Services

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Exchange vs. Non-exchange



Licenses and permits

Characteristics of licenses:
o Exchange transactions: License fees which cover the cost of services
o Non-exchange transactions: License fees that bear little relation to the cost
of services provided and imposed mainly as a source of general revenues.
o License fees are generally non-refundable.
o 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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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?


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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Charges for services


Miscellaneous Revenues

o Proceeds from the sale of government assets
o 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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Revenues that do not fall into one of the other



Sales of Capital Assets

Remember that under Govt. wide model, the sale of

capital assets is recorded under the full accrual basis
of accounting.

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This concept is reinforced by the journal entry on

page 158.

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When a capital asset is sold, financial resources

received are accounted for in a governmental fund,
but the assets that are sold are NOT.


Investment Gains and Losses

FASB broke the tradition later on and required

business investment portfolio to be classified as:
o Trading Securities fair value
o Held-to-maturity
o 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 both realized and unrealized must
be recognized and reported in the statement of activities.

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Until 1993 both GASB and FASB required that short-term

investments be reported at either historical cost or lower of
historical or market value.


Primary objectives of financial reporting:
o Interperiod equity and budgetary compliance.

2 types of financial statements are prepared:

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:
o Imposed nonexchange transactions, ex. property taxes
o Derived exchange transactions, ex. sales taxes
o Government-mandated nonexchange transactions
o Voluntary nonexchange transactions
o Grants
o Other exchange transactions, ex. sale of capital assets
o Investments etc.

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o Fund and Government-wide