The focus of these statements is when and how to record revenue

Major, Al

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University of Tennessee, Knoxville: Trace

University of Tennessee, Knoxville Trace: Tennessee Research and Creative Exchange MTAS Publications: Technical Bulletins Municipal Technical Advisory Service (MTAS) 9-2002 Technical Bulletins: GASB Statements Number 33 and 36 Al Major Muncipal Technical Advisory Service, Alan.Major@tennessee.edu Follow this and additional works at: https://trace.tennessee.edu/utk_mtastech  Part of the Public Administration Commons The MTAS publications provided on this website are archival documents intended for informational purposes only and should not be considered as authoritative. The content contained in these publications may be outdated, and the laws referenced therein may have changed or may not be applicable to your city or circumstances. For current information, please visit the MTAS website at: mtas.tennessee.edu. Recommended Citation Major, Al, "Technical Bulletins: GASB Statements Number 33 and 36" (2002). MTAS Publications: Technical Bulletins. https://trace.tennessee.edu/utk_mtastech/9 This Bulletin is brought to you for free and open access by the Municipal Technical Advisory Service (MTAS) at Trace: Tennessee Research and Creative Exchange. It has been accepted for inclusion in MTAS Publications: Technical Bulletins by an authorized administrator of Trace: Tennessee Research and Creative Exchange. For more information, please contact trace@utk.edu. TECHNICAL BULLETINGASB STATEMENTS NUMBER 33 and 36by Al MajorFinance and Accounting ConsultantSeptember 2002Summary for Non-accountantsThe Governmental Accounting Standards Board (GASB) determines generally acceptedaccounting principles (GAAP ) for governments. They do so by issuing written reports or“statements.” This analysis will acquaint you with the GAAP from GASB StatementsNo. 33 and 36.The focus of these Statements is revenue, specifically, when and how to record revenue. Theserecent accounting changes will show up at year’s end when auditors try to determine what isowed to the city.The concept is to record a receivable for any revenue due or earned by June 30. That is, create anasset for all amounts earned or due as of June 30, but not yet received. This is accomplished with ajournal entry at year’s end. These journal entries can be prepared by your auditor just like otheryear-end journal entries.As an example, local option sales tax is paid on a sale made in June, remitted by the business to thestate by July 20, and shared with cities in August. The monies received in July and August should berecorded as receivables.In somewhat of a paper tiger, these newly accrued revenues show up as receivables (assets) on thebalance sheet. That’s the easy part of the journal entry. The other half of the journal entry will beeither a liability or a revenue. Basically, any receivable collectible within 60 days of year’s end is arevenue of the prior budget year. The receivable becomes cash within 60 days and can be used topay for appropriations.Receivables beyond the 60 day availability window are recorded as deferred revenue (liability) onthe balance sheet. They are not revenues of the prior budget year because the cash comes in toolate. Since Tennessee cities have been accruing receivables thru the 60-day window, any newaccrual will necessarily be recorded as a deferred revenue on the balance sheet. This will be the2University of Tennessee’s Municipal Technical Advisory Servicecase most of the time. Fund balance would be unaffectedas there is an asset with an offsetting liability created. Thebudget is unaffected.These GASB Statements affect all governmental funds.One unusual change involves enterprise funds. Grantswill be considered revenues. Previously, grants wererecorded on the balance sheet as contributed capital.NOTE: The following information is for accountants.Summary for AccountantsGASB Statement No. 33, titled Accounting andFinancial Reporting for Nonexchange Transactions,took effect with the fiscal year beginning July 1, 2000. Inan exchange transaction, you give something directly forsomething else. Metered water sales are good examplesof exchange transactions. In a nonexchange transaction, alocal government’s general fund receives something (salestax) without directly giving something to the payer of thattax. Local governments generate revenues (and assets)mostly through nonexchange transactions, an area thatneeded review and some standardization. StatementNo. 33 defines and classifies nonexchange transactionsinto four categories, which dictate the timing of theirrecognition in financial statements. “Recognition” meansthe posting of the transaction, in this case, as an assetwith an offsetting revenue or liability.The GASB uses four classifications ofnonexchange transactions:1. Derived tax revenues result from assessments onexchange transactions, such as local option sales taxcharged on purchases.2. Imposed nonexchange revenues results from anyother assessments imposed by the local government,such as property taxes.3. Government-mandated nonexchangetransactions result from one government providingresources to another government and requiring(mandating) the recipient government to use thoseresources for a specific purpose. The restricted StateStreet Aid gas taxes is an example.4. Voluntary nonexchange transactions resultfrom contractual or legislative agreements, otherthan exchanges, between two or more parties.Some grants and private donations are examples.State-shared taxes disbursed through a continuingresolution are examples.Statement No. 36, Recipient Reporting for CertainShared Nonexchange Revenues, took effectsimultaneously with Statement No. 33. StatementNo. 36 further defines revenue recognition ofnonexchange transactions that were first presentedin Statement No. 33.Statement No. 33 could be interpreted to requiregrant provider and recipient governments to recordexpenditures and revenues in different years.Statement No. 36 amends that language to eliminatetiming differences, thus requiring grant recipient andprovider governments to account for shared revenuesin the same year.One caveat of modified governmental accounting, themethod used for the general fund, is that any revenuemust be available to pay for expenditures of the budgetyear. This criterion of availability has not changed.Revenues must be available to pay expenditures ofthe fiscal period or budget year. This limits revenuerecognition in the general fund to any monies receivedwithin 60 days after year end. Thus, any other recognitionwould be on the balance sheet.What this generally means for a Tennessee municipalgovernment’s general fund is that new revenue accrualswill show up on the balance sheet as assets with offsettingliabilities. The impact is minimal because our stategovernment has always encouraged adherence toGAAP and requires annual audits of cities. MostTennessee cities were already accruing monies receivedin July, and sometimes August, as revenues of theprevious budget year.GASB No. 33 requires the recognition of receivables,which stretches some of the basic accounting conceptsof matching and modified accrual accounting. GASBNo. 33 requires recognition of nonexchange transactions3University of Tennessee’s Municipal Technical Advisory Servicethat formerly were never recorded in financial statements.One large change for enterprise funds concerns grants.Any grant received after June 30, 2001, will be recordedas a non-operating revenue. It will no longer be recordedas a capital contribution on the balance sheet. (In fact,after implementing GASB No. 34, the ContributedCapital section will be eliminated, and NCGAStatement 2 will no longer be available.)Before GASB No. 33, a utility would classify any capitalgrant, such as one from the Community DevelopmentBlock Grant Program (CDBG), as an increase or creditto contributed capital (a balance sheet account). Then,through the use of NCGA Statement 2, the utility wouldadd back any depreciation based on grant-acquiredassets on the income statement, and reduce thecontributed capital by that same amount. Now, allgrants are recorded as revenues of the period.Detail for AccountantsDerived tax revenues should be recognized as assets inthe fiscal year in which the exchange transaction occurs.They result from assessments on exchange transactions.Revenue should be recognized in the same fiscal yearas the asset, except this rule is trumped by the modifiedaccrual basis of accounting rules concerning availability.This generally means limiting revenue recognition atJune 30 to monies received in July and August.Monies received in advance of the exchange periodshould be classified as a current liability; this would bea debit to cash and an increase or credit to deferredrevenues, chart of account code 22110 series.Local option sales tax revenue, derived from taxablesales, is recognized (booked with a journal entry) atJune 30, for monies to be received in July and August.The theory is that a sale that occurs in June creates thederived sales tax, which is paid and remitted to the statein July where a portion is distributed to the cities inAugust. Thus, July’s and August’s share of the localoption sales tax revenues are booked into the previousyear’s financial statements. This will continue to occuryear after year so that there is always 12 months ofrevenue spanning August to August. Most Tennesseecities already do this. Derived tax revenues include thelocal option sales tax, wholesale beer tax, business tax,room occupancy tax, and amusement tax.Imposed nonexchange revenues are recognized asassets in the fiscal year in which a legal claim is receivedor when monies are received, whichever is first. Propertytaxes are recognized as assets when assessed by thestate. In Tennessee, this occurs on January 1. Therefore,on June 30, Tennessee cities must recognize next year’sproperty tax. That would be an increase or debit toProperty Taxes Receivable (13100) and a credit toDeferred Property Tax Revenue (22120). Note that fundbalance does not change due to adding an asset andoffsetting liability. This is new for Tennessee cities.Revenues from property taxes should be recognized inthe fiscal year for which the taxes are levied, which shouldbe the budget year. All other imposed nonexchangerevenues should be recognized as revenue in the samefiscal year in which the asset is recognized.Monies received in advance of the exchange periodshould be classified as a current liability; this would bechart of account code 22100 series for a deferred credit.Other imposed nonexchange revenues include propertytaxes; their interest and penalties; and fines, forfeitsand penalties.Government-mandated nonexchange transactionsresult from one government providing resourcesto another government and requiring (mandating)the recipient government to use those resources for aspecific purpose.In a government-mandated transaction, one governmentrequires the performance of another government. Therealso may be eligibility requirements. Eligibilityrequirements are established by the provider and maylimit recipients, impose time constraints, define eligiblecosts, or impose other conditions.A grant from CDBG to upgrade a water treatment plant isan example of a government-mandated nonexchange4University of Tennessee’s Municipal Technical Advisory ServiceThe University of Tennessee does not discriminate on the basisof race, sex, color, religion, national origin, age, disability, or veteranstatus in provision of educational programs and services or employment opportunities and benefits. This policy extends to bothemployment by and admission to The University.    The University does not discriminate on the basis of race, sex, ordisability in its education programs and activities pursuant to therequirements of Title VI of the Civil Rights Act of 1964, Title IX ofthe Education Amendments of 1972, Section 504 of the RehabilitationAct of 1973, and the Americans with Disabilities Act (ADA) of 1990.    Inquiries and charges of violation concerning Title VI, Title IX,Section 504, ADA, or the Age Discrimination in Employment Act(ADEA) or any of the other above referenced policies should bedirected to the Office of Diversity Resources (DRES), 2110 TerraceAvenue, Knoxville, Tennessee 37996-3560, telephone(865) 974-2498 (V/TTY available) or (865) 974-2440. Requestsfor accommodation of a disability should be directed to the ADACoordinator at the Office of Human Resources, 600 Henley Street,Knoxville, Tennessee 37996-4125.E14-1050-000-037-03 TMtransaction. This limited use of the grant dollars is called a“purpose restriction.” This also is a reimbursable type ofgrant, which means the city must spend the money first,then apply for reimbursement from CDBG. The “eligibilityrequirement” is that the city spend the money first.Since this type of transaction involves two governments,the assets of one government and the liability of theprovider government will be recognized in the same fiscalyear when all eligibility requirements are met or resourcesare received, whichever is first.Revenues and expenditures are recognized when alleligibility requirements are met and the resourcesare available.Voluntary nonexchange transactions result fromcontractual or legislative agreements, other thanexchanges, between two or more parties. The revenuesreceived from TVA in lieu of tax, the Hall stateincome tax, and private donations are voluntarynonexchange transactions.The state of Tennessee shares some of its derived taxrevenue with cities, based on a continuing resolution.This includes the state sales tax, beer tax and gas tax.For example, a developer is planning to build a newsubdivision and makes an agreement with the city toaccept the roads, sidewalks, and water and sewer linesafter completion. This is a voluntary nonexchangetransaction because the developer does not have todonate the infrastructure.As with a government-mandated nonexchangetransaction, there may be an eligibility requirement. Inthis case, the eligibility requirement by the developer iscompletion of the new subdivision.Assets (recipients) and liabilities (provider), as well asrevenues (recipient) and expenditures (provider), arerecognized as they are in a government-mandatednonexchange transaction.If You Need HelpFor more information about this subject, feel free tocontact your MTAS Finance and Accounting Consultant.Call the MTAS Answer Line to receive quickanswers to short questions: (888) 667-6827 (MTAS).Or, visit our Web site at www.mtas.utk.edu.The Municipal Technical Advisory Service (MTAS)is a statewide agency of The University of Tennessee’sInstitute for Public Service. MTAS operates incooperation with the Tennessee Municipal League toprovide technical assistance services to officials ofTennessee’s incorporated municipalities. Assistanceis offered in areas such as accounting, administration,finance, public works, ordinance codification, andwastewater management.MTAS Technical Bulletins are information briefs thatprovide a timely review of topics of interest to Tennesseemunicipal officials. Bulletins are free to Tennessee local,state, and federal government officials and are availableto others for $2 each.MTAS OFFICESKnoxville (Headquarters): (865) 974-0411Johnson City: (423) 854-9882Nashville: (615) 532-6827Jackson: (731) 423-3710Martin: (731) 587-7055

Technical Bulletins: GASB Statements Number 33 and 36

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Technical Bulletins: GASB Statements Number 33 and 36

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