Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Chapter 5: The Governmental Fund Accounting Cycle General and Special Revenue Funds (Continued) Introduction to Governmental and Not-for-Profit Accounting, 7e

Chapter 5 Topics Recognition and Measurement Principles Property Tax Revenues and Receivables Sales and Income Tax Revenues and Receivables Intergovernmental Grants and Other Revenues Expenditures and Fund Liabilities Interfund Transactions Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Chapter 5 Topics Other Accounting Matters Fund Balance Presentation Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Recognition and Measurement: General Principles Focus on spendable resources – Cash, investments, taxes receivable, due from other funds or governments – NOT capital assets Revenues recognized if resources are “measurable and available” – Available means “collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period” Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Recognition and Measurement: General Principles Expenditure budgeting often on a cash or near-cash basis Expenditures accrued if liabilities are incurred and “normally” paid from current financial resources Modifications to accrual accounting – General long-term debt not reported as liabilities in governmental funds, which results in modifications for long-term debt transactions Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Types of Liabilities in Governmental Funds Once incurred, normally paid in a timely manner from current financial resources – Salaries, professional services, supplies, utilities, and travel Matured liabilities normally expected to be liquidated with expendable available financial resources – Bonds and notes payable Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Property Tax Accounting: Basic Principles Property taxes recognized as revenue when: – Levied AND – Available (collected within at least 60 days of year-end) Defer revenue if not collected in 60 days Reduce revenues to provide for estimated uncollectible taxes, estimated tax refunds or discounts – Establish an “allowance for…”

Property Tax Accounting: Basic Principles Cash or taxes receivable from property tax transactions recognized when either – Enforceable legal claim arises OR – Resources (cash) received Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Property Tax Accounting: Levy, Net of Uncollectibles Levy: Property taxes receivable 1,030,000 Allowance for refunds and uncollectible taxes30,000 Revenues–property taxes 1,000,000 Collection: Cash 990,000 Property taxes receivable990,000

Property Tax Accounting: Taxpayer Appeals Successful appeal of tax assessment: Allowance for refunds and uncollectible taxes25,000 Cash15,000 Property taxes receivable10,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Property Tax Accounting: Year-End Adjustments Reduce allowance: Allowance for refunds and uncollectible taxes2,000 Revenues–property taxes 2,000 Uncollected taxes become delinquent: Property taxes receivable–delinquent 30,000 Property taxes receivable 30,000 Allowance for refunds and uncollectible taxes3,000 Allowance for refunds and uncollectible taxes-delinquent 3,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Property Tax Accounting: Deferred Property Taxes Modified accrual: recognize revenues when available – Collected in the current period OR – After, to pay current bills Within 60 days after period ends Reclassify revenues to be collected later Revenues–property taxes 9,000 Deferred revenues–property taxes 9,000

Tax Discounts Discount for paying property taxes early – Entry when taxes levied Property taxes receivable600,000 Allowance for discounts on property taxes 10,000 Revenues–property taxes 590,000 – Actual discounts taken only $9,000 Cash 591,000 Allowance for discounts on property taxes 10,000 Property taxes receivable 600,000 Revenues–property taxes 1,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Interest and penalties receivable 2,000 Revenues–interest and penalties 2,000 Lien: prevents the sale of property until back taxes are paid Tax liens receivable 8,800 Property taxes receivable-delinquent Interest and penalties receivable 8, Cash 300 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Property Tax Accounting: Interest, Penalties & Liens processing cost

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Property Tax Accounting: Sale at Auction Extreme cases when lien isn’t paid Any remaining proceeds to former owner Cash12,000 Tax liens receivable8,800 Vouchers payable3,200 auctioneer: 1,500 former owner: 1,700

Sales Tax and Income Tax Derived tax revenues – Taxes derived from applying tax rates to exchange transactions (such as sales by merchants or individual earning wages) Recognition – Assets when exchange occurs – Revenue (net of refunds and estimated uncollectible amounts) when exchange occurs AND resources are available Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Sales Taxes State, which collects sales tax for city, remits payment to city Cash 300,000 Revenues–sales taxes 300,000 Year-end accrual for taxes collected in last quarter Sales taxes receivable160,000 Revenues–sales taxes 125,000 Deferred sales tax revenues 35,000 Note that city policy is to consider sales taxes available only if collected by February 28 th of following year. The city expects $35,000 of sales taxes to be received in April. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Intergovernmental Grants Time requirements – Specify period when resources must be used or when use may begin Purpose restrictions – Specify activities for which the grant may be used Recognize revenue when: – Eligibility requirements are met AND – Resources are available Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Intergovernmental Grants Grant with purpose restrictions, but no time requirements – City notified that it has received a state grant that must be used to train police officers. City met all eligibility requirements. Due from state government100,000 Intergovernmental revenues–grants 100,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Intergovernmental Grants Expenditure-driven grants – Reimbursement based grants Allowable costs must be incurred by a government as part of eligibility requirement. – If grantor provides a cash advance Recipient government will defer revenue recognition until allowable costs are incurred. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Intergovernmental Grants Grant with expenditure incurrence and time requirements – State grant to school district to pay 75% of special education teacher salaries. To be eligible, school district must be in applicable school year and have incurred teacher salary costs. – State makes advance payment to school district. Cash200,000 Advance received on grant 200,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Intergovernmental Grants Grant with expenditure incurrence and time requirements (continued) – School district incurs teacher salary costs. Expenditures–special ed. teacher salaries 300,000 Cash 300,000 – School district recognizes revenue for 75% of incurred costs ($300,000 x 75% = $225,000) Advance received on grant 200,000 Due from state government 25,000 Intergovernmental revenues–grants 225,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Fines, Fees, and Licenses Fines and penalties – Imposed nonexchange revenues – Recognition Assets when enforceable legal claim arises Revenues when enforceable legal claim arises AND resources are available Fees and Licenses – Best recognized as revenues when cash received, but if sufficient records exist, may be accrued Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

PILOTs Payments in lieu of taxes – Governments receive payments from other entities because those entities are exempt from property taxes – If PILOT from federal government Recognize when eligibility requirements are met AND amount is available Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Nature of Liabilities in Governmental Funds In general, accrue expenditures if: – Liability is normally paid promptly, in full – From current financial resources – Examples: payroll, supplies, contract services Items that governments expect to liquidate in future time periods – Recognize when due for payment MORE

Modified accrual accounting–expenditures – Vacation pay: accrue only amounts due to be paid to those who have retired at year-end – Claims and judgments: accrue only amounts due on claims settled or adjudicated at year- end Pensions and OPEB – Expenditures and fund liabilities recognized in period financed – Discussed more in Chapter 8 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Nature of Liabilities in Governmental Funds

For a price approximating market terms Example: – Water Utility Fund (seller) Due from General Fund 50,000 Revenues–water services 50,000 – General Fund (purchaser) Expenditures-water services50,000 Due to Water Utility Fund 50,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Interfund Services Provided and Used

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Interfund Transfers Nothing in return Most common interfund activity Not revenues/expenses – Called other financing sources/uses Example: – Subsidy to a debt service fund Transfer out to debt service fund 100,000 Cash (or Due to….if not yet paid) 100,000

Interfund Loans < 1 year: “due to/from other funds” – General Fund (Lender) Due from Proprietary Fund 75,000 Cash 75,000 – Proprietary Fund (Borrower) Cash 75,000 Due to General Fund75,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Interfund Loans > 1 year: “advance to/from other funds” – General Fund (Lender) Advance to Proprietary Fund 75,000 Cash75,000 Unassigned Fund Balance 75,000 Nonspendable Fund Balance75,000 – Proprietary Fund (Borrower) Cash75,000 Advance from General Fund 75,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Interfund Reimbursements One fund pays bills for another Example: – General Fund pays bill for Capital Projects Fund – Reimbursement to General Fund is required – General Fund entry Due from Capital Projects Fund7,000 Expenditures–professional services 7,000 – Capital Projects Fund entry Expenditures–professional services 7,000 Due to General Fund 7,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Acquisition and Disposition of Long-Lived Assets Purchase police sedans Expenditures-capital outlays40,000 Vouchers payable 40,000 Sale police sedans for $3,000 Cash 3,000 Other financing sources–proceeds from the sale of general fixed assets 3,000 Depreciation not recorded in governmental funds because measurement focus is on financial resources, and financial resources used when capital assets acquired. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Inventories Consumption method – Purchased $100,000 and used $85,000 Supplies inventory100,000 Vouchers payable 100,000 Expenditures–supplies 85,000 Supplies inventory 85,000 Purchases method – Purchased $100,000 of inventory Expenditures–supplies 100,000 Vouchers payable 100,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Inventories Purchases method – Ending inventory of $15,000 and no beginning inventory Supplies inventory15,000 Nonspendable fund balance 15,000 Under purchases method, inventory conceptually is not viewed as a financial asset. Therefore, it is recorded as an expenditure when acquired. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* Other Issues Prepaid items – Consumption or purchases method allowed Warrants: an order to treasurer – To issue a check (no entry) – Helps prevent unauthorized payments

Fund Balance Classifications 5 classifications of fund balance – Nonspendable – Restricted – Committed – Assigned – Unassigned Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Nonspendable Fund Balance Amounts not available for appropriation because they are either – Not in spendable form (inventory, prepaid items, long-term interfund loans) or – Legally or contractually required to be maintained intact (corpus of Permanent Fund) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Restricted Fund Balance Most binding degree of constraint Amounts can be used for no purpose other than specified in constitutional provisions, enabling legislation, or contractual provisions. – Restrictions may be externally imposed by creditors (debt covenants), grantors, contributors, or laws or regulations Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Committed Fund Balance Amounts constrained as to use as a result of formal action (legislation, resolution, ordinance) of government’s highest level of decision-making authority. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Assigned Fund Balance Amounts constrained by government’s intent to spend resources for specific purposes. – Intent expressed by governing body or a body or person that governing body designates For all governmental funds except General Fund – Report amounts not reported as nonspendable, restricted, or committed fund balance as assigned fund balance Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Assigned Fund Balance Eliminate all assigned fund balance before reporting a negative unassigned fund balance Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Unassigned Fund Balance Amounts available for spending for any legal purpose Residual classification for General Fund Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Year-End Encumbrances and Fund Balance General fund – If encumbrances are associated with unassigned resources, amounts encumbered from those resources should be reported as assigned fund balance. – Entry to classify year-end open encumbrances as assigned Unassigned fund balance100,000 Assigned fund balance 100,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-*

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 5-* All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.