1 Overview of GASB-33 Accounting and Financial Reporting for Nonexchange Transactions

2 Prepared by the Office of State Controller Financial Reporting Section John Barfield, Manager Phone - (919) Clayton Murphy, Governmental Accounting Research Specialist Phone - (919)

3 GASB Statement No. 33 n Effective for Periods Beginning After June 15, 2000

4 Background n State and local governments engage in two kinds of transactions : –Exchange and exchange-like transactions, and –Nonexchange transactions.

5 Background (exchange and exchange-like) n In an exchange transaction, each party receives and gives up essentially equal values. n An exchange-like transaction differs from a “pure” exchange transaction in that –The values exchanged, though related, may not be quite equal, or –The direct benefits may not be exclusively for the parties to the transaction.

6 An exchange-like transaction has exchange characteristics that are strong enough to justify treating it as an exchange for accounting recognition.

7 Background (continued) n In nonexchange transactions, a government gives (or receives) value without directly receiving (or giving) equal value in return. e.g., your State income tax is not related to the amount of State services that you expect to receive during the year.

8 Background (continued) n Most governments receive a majority of their revenues through nonexchange transactions. n Many governments also provide financial assistance to other governmental and nongovernmental entities.

9 Background (continued) n Common examples of nonexchange transactions include: –Income, sales, and property taxes; –Fines and forfeitures; –grants, entitlements, and other financial assistance; –private donations.

10 Need for Guidance n Prior to GASB-33, the accounting standards included only limited guidance on when to report nonexchange transactions. n Consequently, financial reporting between governments was inconsistent.

11 Pronouncements Issued n To address these shortcomings, the GASB issued an Exposure Draft in March n The Board finalized this proposal in December 1998 with the issuance of GASB-33.

12 Scope and Applicability n Establishes accounting and financial reporting standards for nonexchange transactions involving financial or capital resources. n Applies only to external transactions in which something of value passes between two or more parties.

13 External events include transactions between primary governments and their component units.

14 Excluded From Scope of GASB-33 n Interfund activities (i.e., operating transfers) n Donated services n Food stamps and on-behalf payments –Already covered by GASB-24 n Unfunded mandates n Exchange/exchange-like transactions

15 Exchange-like Transactions n Fees professional license fees and regulatory permits, n Certain developer contributions, n Certain grants and donations, n Other transactions based on an exchange of similar but not equal values. Examples

16 Categories of Nonexchange Transactions n Grouped into four categories based on their principal characteristics –Derived tax revenues –Imposed nonexchange revenues –Government-mandated nonexchange transactions –Voluntary nonexchange transactions

17 The GASB’s approach was to provide general standards rather than to give detailed guidance for specific transactions.

18 Applying GASB-33 n Separate exchange transactions from nonexchange transactions. –May require careful analysis (especially for exchange-like transactions). n Classify nonexchange transactions into one of the four categories. –Based on substance of the transaction rather than its label.

19 Properly distinguishing transactions is even more difficult when a transaction has the characteristics of both exchange and nonexchange transactions.

20 Basis of Accounting n GASB-33 was written in the context of the accrual basis of accounting. n However, for governmental activities, the guidance must also conform to the modified accrual basis. –Recipients must also satisfy the availability criterion when recognizing revenues.

21 Basis of Accounting (continued) n The expenditure recognition standards apply without modification to both the accrual and the modified accrual basis of accounting. n On either basis of accounting, the transactions must also be measurable and probable of collection before recognition can occur.

22 Time Requirements and Purpose Restrictions n In nonexchange transactions, providers of resources frequently stipulate time requirements, purpose requirements or both. n GASB-33 establishes different standards for each.

23 Definitions n Time requirements - Specify the period or periods when resources are required to be used or when use may begin. n Purpose restrictions - Specify the purpose or purposes for which the resources are required to be used.

24 Impact of Time Requirements n Time requirements affect the timing of recognition of nonexchange transactions. –Common to imposed, government- mandated, and voluntary nonexchange transactions. –Derived tax revenues generally do not have time requirements.

25 Time Requirements (continued) n Imposed Nonexchange - only affect revenue recognition (not asset recognition). n Government-Mandated/Voluntary - considered eligibility requirements. –Without compliance, there is no transaction - no asset/revenue recognition (except advance receipts).

26 Impact of Purpose Restrictions n In contrast, purpose requirements only affect the reporting of equity. –Resources with purpose restrictions are reported as a restriction of equity. –Can arise from all four categories of nonexchange transactions.

27 Derived Tax Revenues n Arise from a government imposing a tax on an exchange transaction. n Principal characteristics –The assessing government imposes the tax on the provider, and –The government’s assessment is based on an exchange transaction. Examples - taxes on earnings or consumption.

28 Examples in North Carolina Derived Tax Revenues

29 Accounting Rules - Derived Tax Revenues n Revenue recognition –When the underlying exchange has occurred. Net of estimated refunds and estimated uncollectible amounts. n Asset recognition –When the underlying exchange transaction occurs or when resources are received, whichever is first.

30 Generally no expenditures/liabilities for derived tax revenues (and imposed nonexchange transactions) since only one government is involved.

31 Imposed Nonexchange Revenues n Arise from assessments by governments on nongovernmental entities, including individuals (other than those based on exchange transactions). n Principal characteristic –Imposed by the assessing government on an act committed or omitted by the provider that is not an exchange transaction (e.g., property ownership).

32 Examples in North Carolina Imposed Nonexchange Revenues

33 Accounting Rules - Imposed Nonexchange Revenues n Revenue recognition –When an enforceable legal claim arises unless the enabling legislation includes time requirements. If so, recognize when the use of resources is required or is first permitted. n Asset recognition –When an enforceable legal claim arises or when resources are received, whichever is first.

34 Governments should recognized property tax revenues in the period for which the taxes are levied, even if the enforceable legal claim arises or the due date occurs in a different period.

35 Government-Mandated/Voluntary Nonexchange Transactions n Providers in these two categories of nonexchange transactions frequently establish eligibility requirements. n The eligibility requirements are required to be met before a transactions can occur.

36 If eligibility requirements have not been met, provider does not have a liability, recipient does not have a receivable, and recognition of expenses or revenues for resources transmitted in advance should be deferred.

37 Eligibility Requirements (one or more) n Required characteristics of recipients. –Example - Under certain federal programs, primary recipients must be states and secondary recipients must be school districts. n Time requirements. –May be specified through the enabling legislation, related regulations, or as part of the appropriation process.

38 Eligibility Requirements (continued) n Reimbursements. –Provider offers resources on a reimbursement basis, and –Recipient must incur allowable costs (i.e., “expenditure-driven” grants). n Contingencies (applies only to voluntary). –Offer of resources is contingent upon a specified action of the recipient and action has occurred.

39 Contingency example - a corporation promises to donate money to a university provided alumni can match gift dollar for dollar. Under GASB-33, the university would not recognize revenues until it had raised the appropriate resources.

40 Government-Mandated Nonexchange Transactions n Arise when a provider government –Mandates that a recipient government perform a particular program, and –Provides resources for that purpose. n The fulfillment of eligibility requirements is essential for a transaction to occur.

41 Government-Mandated (continued) n Always create a purpose restriction. n Examples: –Federal grants for mandated drug/alcohol abuse prevention programs. –Financial aid programs.

42 GASB-33 does not apply to unfunded mandates since these type of programs do not involve the exchange of resources.

43 Accounting Rules - Government-Mandated n Revenue recognition –When all eligibility requirements are satisfied. n Asset recognition –When all applicable eligibility requirements have been met or when the resources are received, whichever is first. n Expense/liability recognition –Providers, based on same criteria used by recipients to recognize revenues.

44 Voluntary Nonexchange Transactions n Result from legislative or contractual agreements (other than exchanges) entered into willingly by two or more parties. –Can be based on an oral agreement, provided that it is verifiable. Examples - certain grants, donations, and pledges.

45 Voluntary Nonexchange (continued) n Principal characteristics –They are not imposed on the provider or recipient. –Fulfillment of eligibility requirements is necessary for a transaction to occur. n Both parties may be governments or one party may be nongovernmental (e.g., individual or not-for profit).

46 Accounting Rules - Voluntary Nonexchange n Revenue recognition –When all eligibility requirements are satisfied. Pledges - recognize receivable/revenue provided that promise is verifiable and resources are measurable and probable of collection. Installment payments - recognize full amount as revenue if no time restrictions or other eligibility requirements.

47 For installment payments are spread over more than one year, recipients should recognize revenue equal to the present value of future cash flows.

48 Accounting Rules (continued) - Voluntary Nonexchange n Asset recognition –When all applicable eligibility requirements have been met or when the resources are received, whichever is first. n Expense/liability recognition –Provider, based on same criteria used by recipients to recognize revenues.

49 Accounting Rules - Government-Mandated/Voluntary Nonexchange Special recognition rules n Cash and other assets given for term and permanent endowments: –Recognized as assets/revenues when received (provided that all eligibility requirements are met). –Pledges to give such resources not recognized. n Sometimes a provider does not specify time requirements.

50 Accounting Rules (continued) - Government-Mandated/Voluntary Nonexchange n When occurs - recognize entire award in period when all other eligibility requirements are met. If provider is a government, the applicable period is the first day of the provider’s FY. Provider - recognize a liability/expense for the entire award. Recipient - recognize a receivable/revenue for the entire award.

51 The federal government’s fiscal year begins on October 1. For secondary recipients, the FY of the immediate provider, rather than the originating provider should be used.

52 Recognition of revenues and expenses should not be delayed because routine administrative requirements have not been completed. (i.e., filing of progress reports)

53 Subsequent Contravention n After recognition occurs in the financial statements, it may become apparent that a transaction will not take place because –The eligibility requirements are no longer met, or –The recipient will not comply with the purpose restrictions.

54 Accounting Rules (subsequent contravention) n Recipient - recognize decrease in assets (or an increase in liabilities) and an expense. n Provider - recognize decrease in liabilities (or an increase in assets) and a revenue. Equal to the amount expected to be canceled or reclaimed.

55 n An individual pledges $500,000 to a university hospital to further its mission of serving the indigent. n The donor's letter specifies that he will pay $100,000 per year over the next five years and that each installment should be used in the year it is paid. Example - Multiyear Promise (with Eligibility Requirement)

56 n This example illustrates the characteristics of voluntary nonexchange transactions n However, fulfillment of an eligibility requirement is necessary for a transaction to occur –The period to which each installment applies should have begun Example - Multiyear Promise (continued)

57 n Assuming the installments are probable of collection, the hospital should: –Recognize receivable and revenue of $100,000 in each of the five years. n Requirement to use resources to further hospital's mission is not a purpose restriction since serving the indigent is part of the hospital's general operations. Example - Multiyear Promise (continued)

58 Accounts Receivable $100,000 Private Gifts $100,000 (To record annual pledge to the hospital) Example - Multiyear Promise (continued) Year 1 of 5

59 Illustrative Journal Entries Restate Beginning Fund Equity Grant Receivable XX Beginning Fund Balance Adj. XX (To record PY grant receivables - i.e., eligibility requirements met by recipient)

60 Illustrative Journal Entries Restate Beginning Fund Equity - cont. Beginning Fund Balance Adj. XX Deferred Revenues. XX (To record PY deferred revenues - i.e., grants received but eligibility requirements not met)

61 Illustrative Journal Entries Restate Beginning Fund Equity - cont. Beginning Fund Balance Adj. XX Grants Payable. XX (To record PY grant liabilities - i.e., eligibility requirements met by recipients)

62 Illustrative Journal Entries Restate Beginning Fund Equity - cont. Advances XX Beginning Fund Balance Adj. XX (To record PY grant advances - i.e., grants disbursed but eligibility requirements not met by recipients)

63 Summary of GASB-33 n Establishes accounting and reporting standards for nonexchange transactions involving financial or capital resources. n Defines transactions as external events in which something of value passes between two or more parties. n 4 categories of nonexchange transactions. –Derived tax, imposed, government-mandated, and voluntary.

64 Summary of GASB-33 (continued) n Providers in the last two categories frequently establish eligibility requirements. –Required characteristics of recipients, time requirements, reimbursements, and contingencies. n This statement provides general standards for the recognition of nonexchange transactions rather than detailed guidance on specific transactions.

65 THE END GASB-33 Diploma