Revenue Accounting: Governmental Funds

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 • 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 • Account for and report revenue budget revisions, changes in principles, and revenue-related error corrections & restatements

Revenues in governmental funds • Result in a corresponding increase in net assets of governmental entity as a whole • Result from exchange-like interfund services provided

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 x

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 Comparison of accrual and modified accrual x

Establishing legal claim to revenues • Taxes – levy establishes claims to resources • Charges for services – performing the service • 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 • 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

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

2. Review of Assessment • Performed by local board • May adjust individual assessments • Taxpayers can still appeal in courts

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

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

5. Distribution of Levy to Taxpayers Amount due from each taxpayer is determined by multiplying rate times assessed value of property

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

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

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 • Sale price > than receivable – difference goes to taxpayer • Sale price < than receivable – charge allowance account

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

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

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

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 and expenditure • 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

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

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

Special Assessments

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

Miscellaneous Revenues • Investment earnings • Capital assets sales / losses • PILOTs • Escheats • Private contributions

Investment Earnings • Most complicated issue in this section • Rules changed dramatically with GASBS #31 – some things actually made easier • 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 x

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

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

Payments in Lieu of Tax (PILOTs) • Payment from one government to another because payor does not pay taxes • Federal government major payor • 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

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

Revenue Budget Revisions • Invariably causes changes in Unreserved Fund Balance • Note entry on page 200 – why is it necessary? Important effect is not in the General Ledger but in the Subsidiary Ledger – need General Ledger entry for audit trail purposes.

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 • Recognize the erroneous entry that was recorded • Determine what the correct entry should be • 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”

Identify the error: government accountant incorrectly calculated interest to be accrued – amount recorded was $75; it should have been $100. Error Correction Example – 1

Revenue Accounting: Governmental Funds