Presented by Frank Leonard May 18, 2006

1. Revenue Recognition Presented by Frank Leonard May 18, 2006

2. 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

3. 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”)

4. 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.

5. 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 accrual-that is, when they become both measurable and available to finance expenditures of the fiscal period.”NCGAS 1 paragraph 62Recommended reading: 2005 GAAFR, pgs. 71-80

6. 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.

7. 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 …“

8. Revenue Recognition Revenue Recognition Criteria Accrual vs. Modified Accrual AccrualProceeds must be earned before it can be recognized. However, proceeds do not have to be available before revenue is recognized. Proprietary Funds Modified AccrualProceeds must be earned and available, (which includes being eligible). General Fund, Special Revenue, Capital Project, and Debt Service Funds

9. 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 !

10. Revenue Recognition Deferred RevenueUnearned vs. Deferred Unearned When cash is received in advance of revenue entitlement, (Unearned/Available) When cash is received subsequent to revenue entitlement. (Earned/Unavailable) Deferred

11. 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 DebitCredit Cash (101100) 100Deferred Revenue (230XXX) 100(Unearned) 2. To recognize revenue once revenue recognition criteria has been met: Account DebitCreditDeferred Revenue (230XXX) 100 Revenue (7XXXXX) 100

12. 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 DebitCredit Receivable (11XXXX) 100 Deferred Revenue (230XXX) 100 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 DebitCredit Cash (101100) 100 Receivable (11XXXX) 100Deferred Revenue (230XXX) 100Revenue (7XXXXX) 100

13. Revenue Recognition Review Scenarios

14. 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

15. 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

16. Revenue Recognition Scenario 3 • 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.

17. Revenue Recognition ?

18. Revenue Recognition Contacts Frank Leonard 5-3877