Revenue Accounting: Governmental Funds. Chapter 5

Transcription

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 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

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 Taxes Receivable Current Allowance for Uncollectible Taxes Current Allowance for Discounts Revenues 100,000 5,000 3,000 92,000 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] Cash Taxes Receivable Current Taxes Receivable Delinquent 90,000 70,000 20,000

23 Taxes levied but not available [Page 186] Levy Taxes Receivable Current Allowance for Uncollectible Current Taxes Deferred Revenues 100,000 3,000 97,000 Revenues becomes available Deferred Revenues Revenues 97,000 97,000

24 Taxes collected in advance and later earned [Page 187] Advance collection Cash Taxes Collected in Advance 2,500 2,500 Apply collection to receivable Taxes Collected in Advance Taxes Receivable Current 2,500 2,500

25 Discounts on Taxes [Page ] Taxes Receivable Current Allowance for Uncollectible Current Taxes Allowance for Discounts on Taxes Revenues 300,000 9,000 2, ,000

26 Discounts [continued] Collection within discount period Cash Allowance for Discounts on Taxes Taxes Receivable Current 150,000 1, ,500 Discount period expires Allowance for Discounts on Taxes Revenues

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] Interest & Penalties Receivable Delinquent Taxes Allowance for Uncollectible Interest & Penalties Revenues 15,000 1,000 14,000

29 Accounting for Tax Sales [Page 189] Reclassify assets to lien Tax Liens Receivable Taxes Receivable Delinquent Interest & Penalties Receivable Delinquent Taxes 28,000 25,000 3,000 Add court costs Tax Liens Receivable Cash 1,000 1,000

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

31 Accounting for Tax Sales [continued] Government keeps property [page 190] Expenditures Allowance for Uncollectible Tax Liens Tax Liens Receivable 4,000 2,000 6,000 Record related revenue Deferred Revenues Revenues 4,000 4,000

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 Types of Grants 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

37 Entitlements & Shared Revenues 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

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 ] Grant received Cash Deferred Revenue Qualifying expenditures Expenditures Vouchers Payable Recognize revenue Deferred Revenue Revenue 100,000 40,000 40, ,000 40,000 40,000

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

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

49 Special Assessments [continued] Annual payment comes due Accounts Receivable Current Accounts Receivable Deferred Revenue recognized Deferred Revenues Revenues Interest billed on entire amount Interest Receivable Revenues Interest 20,000 20,000 6,000 20,000 20,000 6,000

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

51 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

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

53 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

54 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)

55 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

56 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

57 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

58 Investment entries [Page 200] Investment (same for A & B) Investments Cash Interest received (same for A & B) Cash Revenues Interest 496,000 30, ,000 30,000

59 Investment entries [continued] Amortized cost A Change in fair value No Entry Amortize discount on investment Investments Revenues Interest Fair value B change in fair value Investments Revenues Increase in Fair Value of Investments 2,000 1,000 2,000 1,000

60 Miscellaneous Revenues Escheats Private Contributions

61 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

62 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

63 Selected Nonrevenue Fund Balance Increases Capital Asset Sales / Losses Internal PILOTs Collateralized borrowings

64 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

65 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

66 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

67 Changes in Accounting Principles Two types Prospective affects only current and subsequent years Retroactive requires restatement of prior years or computation of cumulative effect

68 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

69 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

70 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

71 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

72 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 Revenues Interest 75 75

73 Error Correction Example 2 Correct entry is fairly straight-forward Interest Receivable Revenues Interest

74 Error Correction Example 3 Correction will depend on which year the original error occurred: Current year just add another $25 Interest Receivable Revenue Interest Previous year Revenue account closed Interest Receivable Correction of Prior Year Error