This page covers practice CPA questions covering revenue recognition for government such government-mandated transactions and voluntary nonexchange transactions.
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REVENUE RECOGNITION FOR NONEXCHANGE TRANSACTIONS
Under modified accrual accounting, revenues are recognized when they are both measurable and available to finance expenditures of the current period. Many governmental revenues result page 65from nonexchange transactions. Nonexchange transactions are transactions in which a government receives resources without directly giving equivalent value in exchange. These are in contrast to exchange transactions, such as the purchase of goods or services. The most common forms of nonexchange transactions are tax revenues and intergovernmental grants. Most of the activities of governmental funds are supported by revenues generated through nonexchange transactions. Before a government may recognize revenue resulting from nonexchange transactions, it must meet a number of eligibility requirements. The eligibility requirements are as follows:
1. Required Characteristics of Recipients. The recipient must have the qualifying characteristics specified by the provider. For example, a state can provide funding on a per student basis to public schools. In order to recognize this revenue, the entity must be a public school as defined by state laws.
2. Time Requirement. If time requirements (for expenditure) are specified, those time requirements must be met. For example, a state can provide funding to support park districts for the next fiscal year. In that case, the revenue would not be recognized by the park districts until that fiscal year. If the resource provider does not specify time requirements, then no condition exists and the revenue would be recognized as soon as other eligibility requirements are met.
3. Reimbursement. Many grants require the recipient government to spend money on qualifying items and then request reimbursement. For those grants and gifts that are payable only on a reimbursement basis, revenues would be recognized when the expenditures have been incurred. The government would not have to wait for the payment to be received to recognize this revenue.
4. Contingencies. Resources pledged that have a contingency attached are not recognized as revenue until the contingency has been met. For example, if a donor indicates that $100,000 will be donated to build an addition to the city library provided other donors pledge an equal amount, that revenue would be recognized only after the “matching” $100,000 has been raised from other donors.
Imposed nonexchange transactions are taxes and other assessments imposed by governments that are not derived from underlying transactions. Examples include property taxes, special assessments, and fines and forfeits. A special rule applies to property taxes. Property taxes collected within 60 days after the end of the fiscal year may be deemed to be available and recorded as revenue in the year assessed, rather than the year collected. Amounts expected to be collected more than 60 days after year-end are not recognized as revenue when assessed, but as deferred revenue. Deferred taxes are not liabilities, but are reported as deferred inflows of resources on the Balance Sheet.
Derived tax revenues result from taxes assessed on exchange transactions. Examples include taxes on retail sales, income, and gasoline. The amounts due are recorded in the time period the underlying transaction took place. For example, revenues due from taxes on the sale of gasoline should be recorded along with a receivable (from the retailers) in the month that the gasoline was sold. The revenue is recognized at the time of the exchange transaction provided the cash is expected to be collected shortly after the current fiscal year. If collection is expected to take place after the period considered available to pay current period liabilities (e.g., 60 days), it should be credited to deferred inflows of resources.
Government-mandated transactions and voluntary nonexchange transactions:
Government-mandated transactions and voluntary nonexchange transactions are recorded as revenue when the eligibility requirements have been met. Generally this is when the receiving government has made qualifying expenditures under the grant agreement. Once qualifying expenditures have been made, the government records the grant revenue. The two types of grants differ in whether or not the government has the ability to refuse to participate. For example, government-mandated grants are typically from higher levels of government (federal or state) given to support a required program. For example, a state may require school systems to mainstream certain students in the schools and provide funds to carry out this mandate. Because the program is required, the lower-level government has no choice but to accept. Government-mandated transactions and voluntary nonexchange transactions