Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 4: Recognizing revenues in governmental funds

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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 4: Recognizing revenues in governmental funds. Chapter 4 - Recognizing revenues in governmental funds. After studying chapter 4, you should understand: Why focus on current financial resources and the modified accrual basis for governmental funds, why focus on economic resources and the full accrual basis for government-wide financial statements, distinction between the modified accrual and full accrual basis of accounting,...
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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 4: Recognizing revenues in governmental funds. Chapter 4 - Recognizing revenues in governmental funds. After studying chapter 4, you should understand: Why focus on current financial resources and the modified accrual basis for governmental funds, why focus on economic resources and the full accrual basis for government-wide financial statements, distinction between the modified accrual and full accrual basis of accounting,....

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Click icon to add picture Chapter 4 Recognizing Revenues in Governmental Funds Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 1 All rights reserved. Thoughts to Ponder: Chapter 4 “The thing generally raised on city land is taxes.” - Charles Dudley Warner “For every benefit you receive a tax is levied.” - Ralph Waldo Emerson “Taxes are the sinews of the state.” - Cicero Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 2 All rights reserved. Learning Objectives • Why focus on current financial resources and the modified accrual basis for governmental funds • Why focus on economic resources and the full accrual basis for government-wide financial statements • Distinction between the modified accrual and full accrual basis of accounting • Differentiate between exchange and non-exchange transactions • Main types of non-exchange transactions Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 3 All rights reserved. Measurement Focus and Basis of Accounting •Entity’s measurement focus • What is being reported upon? • Which assets, liabilities, and deferrals are being measured? •Basis of Accounting • When transactions and other events are recognized? Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 4 All rights reserved. Governmental Funds •Measurement Focus: flow of current financial resources (focus is on expendable financial resources) • Revenues must be available to pay liabilities of current period before they can be recognized. • Current financial resources include cash, receivables, marketable securities, prepaid items, and supplies inventories • Capital assets such as land, buildings, and equipment are NOT accounted for in governmental funds, but rather in governmental activities •Basis: modified accrual accounting Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 5 All rights reserved. Revenue Recognition •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. •“Available”: 60 day rule has become the benchmark. But some governments have also established 30, 90 days or 1 year time periods. •Two broad types of Transactions • Non-exchange Transactions • Exchange Transactions Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 6 All rights reserved. Example of Revenue Recognition in CAFR The following note on revenues in the basic financial statements of the City of Louisville, Ohio illustrates the city’s implementation of GASB Statement No. 33. Revenues - Exchange and Non-exchange Transactions- City 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. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 7 All rights reserved. Non-exchange Transactions •External events in which a government gives/receives value without directly receiving/giving equal value in exchange •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 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 8 All rights reserved. Four Nonexchange Transactions Standards for the last 2 transactions apply to both revenues and expenditures. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 9 All rights reserved. Derived Tax Revenues •These are derived from assessments on exchange transactions carried on by taxpayers. • Include sales taxes and income and other taxes on earnings or assets •Recognized as revenue when the underlying exchange transaction takes place. • Example: Sales taxes should be recognized in the period of the underlying sale. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 4 | 10 All rights reserved. Imposed Nonexchange Revenues

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