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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

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Revenue accounting governmental funds

Revenue Accounting:Governmental Funds

Chapter 5


Learning objectives
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
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
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
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
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
Recommended Classes of Revenues

  • Taxes

  • Licenses & permits

  • Intergovernmental revenues

  • Charges for services

  • Fines and forfeits

  • Miscellaneous


Types of tax revenues
Types of Tax Revenues

  • Taxpayer assessed

    • Income taxes

    • Sales taxes

  • Levied – property taxes


Taxpayer assessed 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
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
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
2. Review of Assessment

  • Performed by local board

  • May adjust individual assessments

  • Taxpayers can still appeal in courts


3 equalization of assessments
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
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
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
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
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
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
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
Intergovernmental Revenues

  • Government-mandated nonexchange transactions

  • Voluntary nonexchange transactions


Government mandated 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
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


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

Types of Grants


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

Entitlements & Shared Revenues


Intergovernmental revenue accounting igr issues
Intergovernmental Revenue Accounting (IGR) Issues governments based on relative populations (or some other measure)

  • Fund Identification

  • Pass-Through Grants

  • Revenue Recognition


Fund identification
Fund Identification governments based on relative populations (or some other measure)

  • 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
Pass-Through Grants governments based on relative populations (or some other measure)

  • 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 grants1
Pass-Through Grants governments based on relative populations (or some other measure)

  • 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
Revenue Recognition governments based on relative populations (or some other measure)

  • 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
IGR recognition governments based on relative populations (or some other measure)

  • 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
Charges for Services governments based on relative populations (or some other measure)

  • 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
Special Assessments governments based on relative populations (or some other measure)

  • Service provided in one year, collection made in subsequent years

  • Expenditures recognized for service

  • Revenue deferred until collection


Special assessments1
Special Assessments governments based on relative populations (or some other measure)


Special assessments2
Special Assessments governments based on relative populations (or some other measure)


Fines forfeits
Fines & Forfeits governments based on relative populations (or some other measure)

  • Usually not that big of a source of revenue

  • Revenue usually recognized on a cash basis

  • Large fines might be accrued


Miscellaneous revenues
Miscellaneous Revenues governments based on relative populations (or some other measure)

  • Investment earnings

  • Capital assets sales / losses

  • PILOTs

  • Escheats

  • Private contributions


Investment earnings
Investment Earnings governments based on relative populations (or some other measure)

  • 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
Essential Elements of Fair Value Accounting for Investments governments based on relative populations (or some other measure)

  • 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
Reporting Interest Income and Changes in Fair Value governments based on relative populations (or some other measure)

  • 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
Capital Asset Sales/Losses governments based on relative populations (or some other measure)

  • 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
Payments in Lieu of Tax (PILOTs) governments based on relative populations (or some other measure)

  • 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
Escheats governments based on relative populations (or some other measure)

  • 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
Private Contributions governments based on relative populations (or some other measure)

  • 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
Revenue Budget Revisions governments based on relative populations (or some other measure)

  • 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
Changes in Accounting Principles governments based on relative populations (or some other measure)

Two types

  • Prospective – affects only current and subsequent years

  • Retroactive – requires restatement of prior years or computation of cumulative effect


Common causes of changes
Common Causes of Changes governments based on relative populations (or some other measure)

  • 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
Standard Practices governments based on relative populations (or some other measure)

  • 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
Error Correction governments based on relative populations (or some other measure)

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
Error Correction Issues governments based on relative populations (or some other measure)

  • 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”


Error correction example 1

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

Error Correction Example – 1


Error correction example 2
Error Correction Example – 2 calculated interest to be accrued – amount recorded was $75; it should have been $100.

Correct entry is fairly straight-forward


Error correction example 3
Error Correction Example – 3 calculated interest to be accrued – amount recorded was $75; it should have been $100.


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