Revenue Recognition

Modified accrual accounting dictates that revenues for non-exchange transactions be recognized when they are measurable and available to fund operations of the current period. Non-exchange transactions are those in which the government receives resources without giving something of equal value in exchange for those resources. The most common example would be tax revenues.

Before a government can recognize non-exchange revenues, any eligibility requirements must first be met. Those requirements fall into the following categories:

• Required characteristics of recipients: If the provider of the resources specifies the characteristics of those to benefit from the resources, those requirements must be met. For example, a grant may specify that beneficiaries be minority-owned businesses.
• Time requirement: If the provider of the resources specifies when resources must be spent, those requirements must be met. For example, a donor may specify that funds be spent on cemetery maintenance during the next year. The gift would be recognized as revenue that next year.
• Reimbursement: Many grants and gifts promise to reimburse governments for qualified expenditures. The revenue will not be recognized until the expenditures have been made.
• Contingencies: Resources that have a contingency attached do not get recognized as revenue until the contingency has been met. For example, a donor may pledge a gift of $1,000,000 to support construction of a new park if the city can raise an additional $1,000,000 from other sources. Until the city raises the additional funds, it cannot recognize the donor's gift as revenue.

Non-exchange transactions fall into four categories: imposed non-exchange transactions, derived tax revenues, government-mandated non-exchange transactions, and voluntary non-exchange transactions (described below). Specific journal entries for each type of non-exchange transaction are presented in Illustration 3-5 in your textbook.

• Imposed non-exchange transactions involve taxes and other assessments that don't result from an underlying transaction. Examples include property taxes and fines. Property taxes are considered available to finance current-year expenditures if they are collected within 60 days after the end of the current fiscal year. As such, they will be considered revenue for the current year. Any property taxes expected to be collected after 60 days following the end of the fiscal year will be deferred until the next year.
• Derived tax revenues involve taxes based on exchange transactions conducted by businesses and citizens. Examples include sales taxes (based on sales of goods and services), income taxes (based on income earned by citizens and businesses), and excise taxes (based on sales of specific goods such as gasoline).
• Government-mandated non-exchange transactions are grants from higher levels of government that support required programs.
• Voluntary non-exchange transactions are donations and grants that support a voluntary program.

Classes and Timing of Recognition of Revenue from Non-exchange Transactions

Type	Description and Examples	Modified Accrual Basis (Governmental Fund Basis)	Representative Transactions	Sample Journal Entry (Governmental Fund-Basis Reporting)
Imposed Non-exchange Revenues	Taxes and other assessments that do not result from an underlying transaction. Examples include property taxes and special assessments imposed on property owners. Also includes fines and forfeits.	Record the receivable (and an allowance for uncollectibles) when an enforceable claim exists. Revenues should be recognized in the period for which the taxes are levied (i.e., budgeted), but are also subject to the availability rule. Property tax revenues expected to be collected over 60 days after year-end are deferred.	1. Property taxes levied 2. Deferral of portion expected to be collected over 60 days after the year-end	1. Taxes Receivable ............ Dr Estimated Uncollectible Taxes ........... Cr Revenues Control ............................. Cr 2. Revenues Control ........... Dr Deferred Revenues—Property Taxes................................................. Cr
Derived Tax Revenues	These are taxes assessed on exchange transactions conducted by businesses or citizens. Examples include sales, income, and excise taxes.	Record the receivable when the taxpayer's underlying transaction takes place. Revenues should be recognized when available and measurable. Revenues not expected to be collected in time to settle current liabilities are deferred (i.e., available and measurable criteria).	1. Income tax withholdings are received. 2. Additional income taxes expected to be received after year-end. Part of this will not be received in time to be available to settle current liabilities.	1. Cash ......................................... Dr Revenues Control ............................. Cr 2. Taxes Receivable ....................... Dr Revenues Control ............................ Cr Deferred Revenues—Income Taxes................................................ Cr
Government-Mandated Non-exchange Transactions   Voluntary Non-exchange Transactions	Grants from higher levels of government (federal or state) given to support a program. Since the program is required, the lower-level government has no choice but to participate. Donations and grants given to support a program. Since the program is not required, the receiving government voluntarily agrees to participate.	The recognition rules are the same for mandated and voluntary non-exchange grants. Record the revenue when all eligibility requirements have been met. In the case of reimbursement grants, revenue is recognized only when qualified expenditures have been incurred. In the case of advance funded grants, recognize revenues as qualified expenditures are incurred.	Reimbursement grant: 1. Incur qualified expenditures. 2. Recognize revenue. ————————— Advance funded grant: 3. Receipt of advance funding. 4. Incur expenditures and recognize revenue in an equal amount.	1. Expenditures Control ................. Dr Accounts Payable/Cash ................... Cr 2. Due from grantor ....................... Dr Revenues Control ............................ Cr ——————————————————— 3. Cash .......................................... Dr Deferred Revenues—Grants ............. Cr 4 a. Expenditures Control ............... Dr Accounts Payable/Cash .................... Cr 4 b. Deferred Revenues—Grants ..... Dr Revenues Control ............................. Cr

In this lesson, you have learned the criteria for recognizing revenues and expenditures for governmental funds, as well as some specific journal entries that a fund may record. In addition, the lesson defined the different categories of fund balance. Using what you've learned, proceed to the assignments in the next section.