Chapter 4
Governmental Activities—Revenues
Questions for Review and Discussion
1. Basis of accounting refers to when transactions and events are recognized.
Measurement focus refers to what is being reported upon — that is, which assets and
liabilities are being measured. Once one is selected, the other is automatically
determined. What is reported upon (i.e., measurement focus) establishes when
transactions and events are recognized (basis of accounting). For example, if the focus
is on net financial resources, then revenues and expenditures would be recognized
whenever there is an increase or decrease in net financial assets.
2. The measurement focus of governmental funds is on the inflows, outflows, and
balances of current financial resources. Governmental funds are accounted for on a
modified accrual basis. Current financial resources include cash and other items that
can be expected to be transformed into cash in the normal course of operations. The
other items include investments and receivables but not capital assets.
Current financial resources and the modified accrual basis of accounting are a
compromise between a measurement focus and basis of accounting that would
measure interperiod equity and one that would report upon budgetary compliance.
Interperiod equity can best be reported upon by focusing on all economic resources
and using a full accrual basis of accounting. Budgetary compliance can be reported
upon satisfactorily by focusing on the same resources as does the budget of the
individual government. However, governments do not all budget on the same basis, so
statements on a budgetary basis would not be readily comparable.
3. An exchange transaction is one in which each party gives and receives consideration of
equal value. A nonexchange transaction is one in which one party gives or receives
value without directly receiving or giving equivalent value in exchange.
4. The main categories of revenues per GASB Statement No. 33 are:
, Imposed nonexchange revenues. These result from assessments imposed on
individuals and business entities. The most prominent of these are property taxes
and fines.
Derived tax revenues. These are derived (i.e., result) from assessments on
exchange transactions carried on by taxpayers. They include sales taxes (derived
from sales transactions), and income and other taxes on earnings (derived from
various income-producing commercial transactions).
Government-mandated nonexchange transactions . These occur when a
government at one level (e.g., the federal government or a state government)
provides resources to a government at another level (e.g., a local government or a
school district) and requires the recipient to use the resources for a specific
purpose. For example, a state may grant funds to a county stipulating that the
resources be used for road improvements.
Voluntary nonexchange transactions. These result from legislative or contractual
agreements entered into willingly by two or more parties. They include grants
given by one government to another and contributions from individuals (e.g., gifts
to public universities). Often the provider imposes eligibility requirements or
restrictions as to how the resources may be used. These types of transactions are
similar to government-mandated nonexchange transactions, but they differ in that
the recipient government is not required to accept the resources.
5. Revenues must be (a) measurable and (b) available to finance expenditures of the
current period. The nonexchange revenues of governments are intrinsically associated
with expenditures; they are generated solely to meet expenditures. Therefore it is
reasonable to recognize revenues only to the extent that they are available to cover the
expenditures with which they are associated.
6. Property taxes should be recognized in the period for which the taxes are levied, in
both the fund statements and the government-wide statements. In the fund
statements, the taxes must meet the additional criterion that they be “available.”
7. Sales taxes should be recognized in the period in which the underlying sales
transaction takes place. Sales taxes are “derived” from an underlying economic event
— that event being the sales transaction. Hence it is appropriate to recognize revenue
at the time of the event.
8. Reimbursement grants are payments that are intended to pay for specified
expenditures and are payable only when those expenditures are made. Most typically
the grantor reimburses the grantee for all or a portion of allowable costs. Entitlements,
by contrast, are payments, usually from a higher-level government, to which a state or
local government is automatically entitled in an amount determined by a specified
formula.
, Because reimbursement grants are tied directly to specific expenditures, they should
be recognized as revenues in the same period as the expenditures — i.e., when the
grantee satisfies the eligibility requirements by incurring allowable costs. Entitlements
do not typically have any significant eligibility requirements. Hence, they generally can
be recognized as revenue as soon as the funds are available for expenditure. They may,
however, have time requirements in that they must be spent in a specified period. If
so, recognition should take place in the period or periods when resources are required
to be used or when use may begin.
9. The city can recognize the revenue as soon as it has met all eligibility requirements —
in this case none. Therefore, in its government-wide statements it can recognize
revenue upon receipt of the pledge. However, in its fund statements, the donation
cannot be recognized as revenue until it is available for expenditure — i.e., when the
cash is received or is expected to be received in time to meet current-year
expenditures.
10. Pass-through grants are awards that a government must either transfer to, or spend
on behalf of, a third-party recipient. A grant recipient should report a pass-through
grant as both revenue and an expenditure as long as the government serves as more
than a cash conduit — that is, if it does more than merely transmit grantor-supplied
moneys without having “administrative involvement.” Administrative involvement
may be indicated by selecting recipients or monitoring performance.
11. The situation described by the student arises because the capital assets are not
recognized as assets in the governmental funds. These funds focus on current financial
resources. Hence, the proceeds from the sale of scrap increase fund balance. In the
business sector, fixed assets, although recognized on the balance sheet, are not
necessarily reported at market values. Hence, if an asset were destroyed and sold
(either as scrap or to an insurance company as part of a settlement) the entity could
also report a gain. Neither businesses nor governmental funds record assets at
amounts indicative of their economic values. In businesses they are recorded at
historical cost, less accumulated depreciation; in governmental funds they are
recorded at zero. In the context of the government model, the recognition of the
increase in fund balance makes perfect sense.
12. The arguments in favor of fair value accounting would include the following:
Fair value is more relevant for most decisions.
Investments are held as cash substitutes and can readily be exchanged for cash.
In that sense the increases in value are “available.”
Fair values are objective; price quotes are readily available for most types of
securities.
, The performance of investment managers, and their employer governments, is
measured by total return — dividends, interest, and changes in fair values.
The arguments against fair value accounting would include the following:
Cost or amortized cost is more objective than fair value, especially for
instruments that do not have a quoted market price.
Amortized cost is more relevant for investments that the entity plans to hold to
maturity.
Changes in fair value include both realized and unrealized gains and losses. For
some performance measures and other decisions, it may be important to focus
on realized gains and losses, calculated based on cost.
Exercises and Problems
4-1
1. d
2. a
3. b
4. c
5. c
6. d
7. b
8. b
9. a
10. a
Governmental Activities—Revenues
Questions for Review and Discussion
1. Basis of accounting refers to when transactions and events are recognized.
Measurement focus refers to what is being reported upon — that is, which assets and
liabilities are being measured. Once one is selected, the other is automatically
determined. What is reported upon (i.e., measurement focus) establishes when
transactions and events are recognized (basis of accounting). For example, if the focus
is on net financial resources, then revenues and expenditures would be recognized
whenever there is an increase or decrease in net financial assets.
2. The measurement focus of governmental funds is on the inflows, outflows, and
balances of current financial resources. Governmental funds are accounted for on a
modified accrual basis. Current financial resources include cash and other items that
can be expected to be transformed into cash in the normal course of operations. The
other items include investments and receivables but not capital assets.
Current financial resources and the modified accrual basis of accounting are a
compromise between a measurement focus and basis of accounting that would
measure interperiod equity and one that would report upon budgetary compliance.
Interperiod equity can best be reported upon by focusing on all economic resources
and using a full accrual basis of accounting. Budgetary compliance can be reported
upon satisfactorily by focusing on the same resources as does the budget of the
individual government. However, governments do not all budget on the same basis, so
statements on a budgetary basis would not be readily comparable.
3. An exchange transaction is one in which each party gives and receives consideration of
equal value. A nonexchange transaction is one in which one party gives or receives
value without directly receiving or giving equivalent value in exchange.
4. The main categories of revenues per GASB Statement No. 33 are:
, Imposed nonexchange revenues. These result from assessments imposed on
individuals and business entities. The most prominent of these are property taxes
and fines.
Derived tax revenues. These are derived (i.e., result) from assessments on
exchange transactions carried on by taxpayers. They include sales taxes (derived
from sales transactions), and income and other taxes on earnings (derived from
various income-producing commercial transactions).
Government-mandated nonexchange transactions . These occur when a
government at one level (e.g., the federal government or a state government)
provides resources to a government at another level (e.g., a local government or a
school district) and requires the recipient to use the resources for a specific
purpose. For example, a state may grant funds to a county stipulating that the
resources be used for road improvements.
Voluntary nonexchange transactions. These result from legislative or contractual
agreements entered into willingly by two or more parties. They include grants
given by one government to another and contributions from individuals (e.g., gifts
to public universities). Often the provider imposes eligibility requirements or
restrictions as to how the resources may be used. These types of transactions are
similar to government-mandated nonexchange transactions, but they differ in that
the recipient government is not required to accept the resources.
5. Revenues must be (a) measurable and (b) available to finance expenditures of the
current period. The nonexchange revenues of governments are intrinsically associated
with expenditures; they are generated solely to meet expenditures. Therefore it is
reasonable to recognize revenues only to the extent that they are available to cover the
expenditures with which they are associated.
6. Property taxes should be recognized in the period for which the taxes are levied, in
both the fund statements and the government-wide statements. In the fund
statements, the taxes must meet the additional criterion that they be “available.”
7. Sales taxes should be recognized in the period in which the underlying sales
transaction takes place. Sales taxes are “derived” from an underlying economic event
— that event being the sales transaction. Hence it is appropriate to recognize revenue
at the time of the event.
8. Reimbursement grants are payments that are intended to pay for specified
expenditures and are payable only when those expenditures are made. Most typically
the grantor reimburses the grantee for all or a portion of allowable costs. Entitlements,
by contrast, are payments, usually from a higher-level government, to which a state or
local government is automatically entitled in an amount determined by a specified
formula.
, Because reimbursement grants are tied directly to specific expenditures, they should
be recognized as revenues in the same period as the expenditures — i.e., when the
grantee satisfies the eligibility requirements by incurring allowable costs. Entitlements
do not typically have any significant eligibility requirements. Hence, they generally can
be recognized as revenue as soon as the funds are available for expenditure. They may,
however, have time requirements in that they must be spent in a specified period. If
so, recognition should take place in the period or periods when resources are required
to be used or when use may begin.
9. The city can recognize the revenue as soon as it has met all eligibility requirements —
in this case none. Therefore, in its government-wide statements it can recognize
revenue upon receipt of the pledge. However, in its fund statements, the donation
cannot be recognized as revenue until it is available for expenditure — i.e., when the
cash is received or is expected to be received in time to meet current-year
expenditures.
10. Pass-through grants are awards that a government must either transfer to, or spend
on behalf of, a third-party recipient. A grant recipient should report a pass-through
grant as both revenue and an expenditure as long as the government serves as more
than a cash conduit — that is, if it does more than merely transmit grantor-supplied
moneys without having “administrative involvement.” Administrative involvement
may be indicated by selecting recipients or monitoring performance.
11. The situation described by the student arises because the capital assets are not
recognized as assets in the governmental funds. These funds focus on current financial
resources. Hence, the proceeds from the sale of scrap increase fund balance. In the
business sector, fixed assets, although recognized on the balance sheet, are not
necessarily reported at market values. Hence, if an asset were destroyed and sold
(either as scrap or to an insurance company as part of a settlement) the entity could
also report a gain. Neither businesses nor governmental funds record assets at
amounts indicative of their economic values. In businesses they are recorded at
historical cost, less accumulated depreciation; in governmental funds they are
recorded at zero. In the context of the government model, the recognition of the
increase in fund balance makes perfect sense.
12. The arguments in favor of fair value accounting would include the following:
Fair value is more relevant for most decisions.
Investments are held as cash substitutes and can readily be exchanged for cash.
In that sense the increases in value are “available.”
Fair values are objective; price quotes are readily available for most types of
securities.
, The performance of investment managers, and their employer governments, is
measured by total return — dividends, interest, and changes in fair values.
The arguments against fair value accounting would include the following:
Cost or amortized cost is more objective than fair value, especially for
instruments that do not have a quoted market price.
Amortized cost is more relevant for investments that the entity plans to hold to
maturity.
Changes in fair value include both realized and unrealized gains and losses. For
some performance measures and other decisions, it may be important to focus
on realized gains and losses, calculated based on cost.
Exercises and Problems
4-1
1. d
2. a
3. b
4. c
5. c
6. d
7. b
8. b
9. a
10. a
