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:
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:
Proprietary fund revenues include charges for services, charges to other funds for services rendered, and grant revenues.
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 are reported on the statement of activities in the following three categories, if applicable:
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.
Classification of Revenues
Exhibit 6 shows each financing source classified as either program revenue of general revenue.
What is the modified accrual basis?
Modified accrual is a combination of cash basis and full accrual basis. Revenues are recognized when they are both measurable and available. Measurable — the cash flow from the revenue can be reasonably estimated. Available — the revenue is available to finance current expenditures to be paid within 60 days.
When should accrued revenue be recorded?
Accrued revenue is used in accrual accounting where revenue is recorded at the time of sale, even if payment is not yet received. This follows the revenue recognition principle, which requires that revenue be recorded in the period in which it is earned.
Which funds are accounted for using the modified accrual basis of accounting?
All Governmental Funds use the modified accrual basis of accounting and their measurement focus is a flow of spendable financial resources. The General Fund is usually created at the inception of a governmental unit and exists throughout the life of that unit.
What criteria must be met before revenues can be recognized on a modified accrual basis what is the rationale for these criteria?
(On the modified accrual basis of accounting, revenues should be recognized when the underlying exchange has occurred and the resources are available.) Resources received before the underlying exchange has occurred should be reported as deferred revenues (liabilities).