In this video, we walk through 5 BAR practice questions on nonexchange revenue using modified accrual. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Nonexchange Revenue Using Modified Accrual
State and local governments frequently receive resources without providing goods or services of equal value in return. These transactions are called nonexchange transactions and include items such as property taxes, sales taxes, and government grants.
When nonexchange revenue is reported in a governmental fund, determining the correct amount to recognize requires more than simply identifying the amount owed to the government. The revenue must meet the applicable recognition requirements and be both measurable and available under the modified accrual basis of accounting.
The Measurable and Available Criteria
Governmental funds recognize revenue when it is both measurable and available.
Revenue is measurable when the government can reasonably determine the amount it is entitled to receive. Revenue is available when it is collected during the current reporting period or soon enough after year-end to finance the current period’s expenditures.
Governments establish an availability period that defines how long after year-end collections may still be treated as current-period revenue. For example, suppose a city has a 60-day availability period. Taxes collected by year-end or during the first 60 days after year-end may be recognized as revenue for the current year, provided the other recognition requirements have also been met. Taxes collected after that period are not recognized as current-year revenue.
The availability period may vary depending on the government or the type of revenue. Therefore, the period provided in the question should always be used rather than assuming that every government uses 60 days.
Meeting the Time Requirement Is Not Enough
Each type of nonexchange transaction has certain requirements that determine when the government becomes entitled to recognize the transaction. For an imposed nonexchange revenue such as property taxes, the taxes generally relate to the period for which they were levied.
However, satisfying the time requirement does not automatically mean that the entire amount is recognized as revenue in a governmental fund. The amount must also satisfy the measurable and available criteria.
For example, assume a city levied $700,000 of measurable property taxes for the current year. If $620,000 was collected by year-end or within the city’s availability period, only $620,000 would be recognized as current-year revenue. The remaining $80,000 relates to the current year and is measurable, but it is unavailable because it was collected too late.
Reporting Unavailable Revenue
When a measurable receivable relates to the current period but does not meet the availability criterion, the government may still report the full receivable. However, the unavailable portion is reported as a deferred inflow of resources instead of revenue.
Using the previous example, the entry would be:
Debit: Property Taxes Receivable $700,000
Credit: Property Tax Revenue $620,000
Credit: Deferred Inflows of Resources—Unavailable Revenue $80,000
The deferred inflow prevents the unavailable amount from being included in current governmental fund revenue. When the resources later become available, the government can recognize the related revenue in the appropriate period.
Reimbursement Grants
A reimbursement grant is a voluntary nonexchange transaction in which one government reimburses another government for qualifying expenditures. The receiving government generally meets the grant’s eligibility requirements when it incurs allowable costs.
Suppose a grant reimburses a city for 75% of eligible costs. If the city incurs $400,000 of qualifying costs during the permitted period, it may be entitled to a reimbursement of $300,000.
$400,000 × 75% = $300,000
In a governmental fund, however, the city must also apply the availability requirement. If only $255,000 is received within the city’s availability period, the city recognizes $255,000 as current-year grant revenue. The remaining $45,000 is measurable but unavailable and is reported as a deferred inflow rather than current-year revenue.
Costs incurred outside the period permitted by the grant do not satisfy the eligibility requirements. Those costs should not be included when calculating the reimbursement.
Allocating Taxes Collected by Another Government
A state may collect a combined tax on behalf of itself and one or more local governments. In this situation, the local government must determine its share of the total collections before recognizing revenue.
Suppose a state collects a combined 8% sales tax. Of that rate, 6% belongs to the state and 2% belongs to a city. The city is entitled to one-fourth of the combined collections because its 2% portion represents one-fourth of the total 8% rate.
If $1,200,000 of qualifying taxes was collected within the city’s availability period, the city’s share would be:
$1,200,000 × 2% ÷ 8% = $300,000
The city would recognize $300,000 of sales tax revenue. Amounts collected after the availability period would be excluded from current-year revenue, even if the underlying taxable sales occurred before year-end.
Future-Period Resources
Receiving cash before year-end does not always create current-year revenue. If a grant or other nonexchange transaction requires the resources to be used in a future period, the time requirement has not yet been met.
For example, if a city receives grant money in June but cannot use it until the next fiscal year, the amount is not current-year revenue. It should remain deferred until the period in which the government is first permitted to use the resources.
The central rule is that governmental fund revenue must satisfy all applicable recognition requirements and be measurable and available. Cash collection is important, but it must be considered together with the transaction’s time and eligibility requirements.
