Under the modified accrual basis of accounting, revenues should be recognized when

Chapter 5: Financial Reporting — Revenues

The accounting and financial reporting of revenues within a governmental entity is determined by the economic substance of the underlying transactions. Generally Accepted Accounting Principles have established criteria for determining the type of transaction based on the classification and characteristics of the transaction.

Within governmental entities, transactions may be classified as either exchange (or exchange-like) transactions or nonexchange transactions. Exchange transactions are those in which the parties involved give up and receive essentially equal values. Within a commercial enterprise, transactions between businesses and their customers meet this definition. Within a proprietary fund of a governmental entity, fees or charges made for goods or services represent exchange transactions.

Although similar to exchange transactions, exchange-like transactions represent situations in which the values exchanged may not be equal or the direct benefits may not be exclusively for the parties involved in the transaction. Examples include permits and professional or regulatory licensing fees.

To clarify and expand on existing guidance on the accounting and financial reporting of nonexchange transactions within governments, GASB issued Statement 33, Accounting and Financial Reporting for Nonexchange Transactions and Statement 36, Recipient Reporting for Certain Shared Nonexchange Revenues—An Amendment of GASB Statement 33. These standards establish recognition criteria for nonexchange transactions reported on the accrual basis or the modified accrual basis of accounting.

GASB Statement 33 describes the following four classifications of nonexchange transactions:

• Derived tax revenues result from assessments imposed on exchange transactions, such as income taxes and sales taxes. Derived tax revenues and the related receivables normally should be recognized when the underlying transaction occurs, with the criteria extended to include the availability criteria for revenues accounted for on the modified accrual basis.
• Imposed nonexchange revenues result from assessments imposed on nongovernmental entities other than assessments on exchange transactions. Property taxes, ad valorem taxes on personal property, and fines are common examples. A receivable is usually recognized at the time an enforceable legal claim arises. Imposed nonexchange revenues should be recognized in the first period in which the use of the revenues is permitted or required. For imposed nonexchange revenues accounted for on a modified accrual basis, recognition also depends on the availability of the resources.
• Government-mandated nonexchange transactions occur when one level of government provides resources to another level of government and requires the recipient to use the resources for a specific purpose in accordance with the provider's enabling legislation. An example is the federal funds provided for food and nutrition programs in school districts.
• Voluntary nonexchange transactions result from legislative or contractual agreements, other than exchanges, entered into willingly by two or more parties. Certain grants and entitlements and most donations are examples of this type of transaction. Frequently, purpose restrictions and eligibility requirements are established by the provider.

For both government-mandated nonexchange transactions and voluntary nonexchange transactions, revenues and receivables should be recognized when all eligibility requirements have been met. For revenues accounted for on a modified accrual basis, the criteria are extended to include the availability of the resources.

GASB Codification Section 1600.106 states that revenues in governmental funds and other governmental fund financial resource increments are recognized using the modified accrual basis of accounting when they are susceptible to accrual, which means they must be both measurable and available. Revenues are measurable when the amount of the revenue is subject to reasonable estimation. To be available, revenues must be subject to collection within the current period or be collected after the end of the period but in time to pay liabilities outstanding at the end of the current period.

Revenues in proprietary funds are recognized using the accrual basis of accounting (i.e., in the period in which they are earned) and are classified either as operating or nonoperating. Whereas operating revenues are generated by the primary activity of the fund, nonoperating revenues are generated by other means, such as through grants or interest earnings.

Governmental entities account for a variety of revenues that generally may be presented in the financial statements of governmental funds in the following three broad categories:

• Local and intermediate sources are those revenues collected from the citizens of the school district's service area and governmental and nongovernmental entities both within and outside the district. Such revenues include property taxes, tuition, and interest income.
• State revenues are those revenues collected from the citizens of the school district's service area and governmental and nongovernmental entities both within and outside the district. Such revenues include property taxes, tuition, and interest income.
• Federal revenues are those revenues received from the federal government or its agencies, either directly or through the state. Such revenues are primarily from federal programs.

Proprietary fund revenues include charges for services, charges to other funds for services rendered, and grant revenues.

Government-Wide Reporting

GASB Statement 34 introduced a number of new reporting concepts for revenues in the government-wide statements. Essentially, revenues must be classified as either program or general revenues on the statement of activities. The following subsections outline the basic reporting criteria established for revenues.

Program Revenues
Program revenues are revenues that are directly attributable to a specific functional activity. Generally Accepted Accounting Principles require these revenues to be presented separately in the appropriate functional areas, providing a calculation of net expense for each activity. This net expense often represents the level of support required from the government's own resources. Program revenues include fees collected from those who benefit from the program, grants, and other contributions required by the resource provider to support a specific activity.

Program revenues are reported on the statement of activities in the following three categories, if applicable:

• Charges for services are revenues that arise from charges to customers or applicants who purchase, use, or directly benefit from the goods, services, or privileges provided. Examples are rental fees for school buses or facilities, athletic participant or spectator fees, summer school tuition, or library fines.
• Program-specific operating grants and contributions are revenues that occur from mandatory and voluntary nonexchange transactions with other governments, organizations, or individuals that are restricted for use in a particular program. An example is a business grant to provide a scholarship for staff training.
• Program-specific capital grants and contributions are grants and contributions that consist of capital assets or resources that are restricted for capital purposes, such as purchasing, constructing, or renovating capital assets associated with a specific program. These revenues should be reported separately from grants and contributions that may be used either for operating or capital expenses at the judgment of the reporting government. An example is a grant to purchase a school bus.

Program revenues are reported as gross amounts. The statement of activities also reports program expenses net of applicable program revenues. GASB Statement 37 clarified that different captions and additional categories may be used for program revenues.

General Revenues
All revenues are general revenues unless they are required to be reported as program revenues. General revenues are reported in the government-wide statement of activities after program revenues have been subtracted from functional expenses.

Classification of Revenues
Programs are financed from essentially four sources:

• Type A—those who purchase, use, or directly benefit from the goods or services of the program;
• Type B—parties outside the reporting government's citizenry;
• Type C—taxpayers (regardless of whether they benefit from a particular program); and
• Type D—the governmental institution itself (primarily investment income).

Exhibit 6 shows each financing source classified as either program revenue of general revenue.

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What is the modified accrual basis?

When should accrued revenue be recorded?

Which funds are accounted for using the modified accrual basis of accounting?

What criteria must be met before revenues can be recognized on a modified accrual basis what is the rationale for these criteria?