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May 1991

GASB moves ahead with MFBA: credits to follow later. (Governmental Accounting Standards Board Statement 11, Measurement Focus and Basis of Accounting - Governmental Fund Operating Statements)

by Seville, Mary Alice

    Abstract- The Governmental Accounting Standard Board's (GASB) Statement 11, Measurement Focus and Basis of Accounting - Governmental Fund Operating Statements, has made changes in the accounting procedures for governmental fund operating statements. GASB Statement 11 applies an accrual basis of accounting and a flow of financial resources concept to governmental accounting. The Statement covers the accounting of government fund revenues, including property taxes, sales tax revenue, and income tax revenue. The recognition criteria for revenue are that the event or transaction has occurred, and the government has established a due date on or before the end of the period.

Before looking at what the statement says, it is interesting to explore the implication of the "governmental fund operating statements" part of the statement's title. The GASB believes that measuring interperiod equity is a primary responsibility of a government and that current requirements inadequately report interperiod equity.

Interperiod equity measurement is the measure of whether current-year revenues were sufficient to pay for current-year services. It would appear that GASB views reporting on operations to be more important than reporting financial position. Thus, it chose the measurement focus that is most appropriate for measuring operating results and provided guidance on accounting for operating statement effects. But the statement does not give guidance on the accounting for the balance sheet effect of some transactions. In some instances, this leads to knowing what to debit but not what to credit.

The GASB defines financial resources as:

"... cash, claims to cash (for example, debt securities of another entity and accounts and taxes receivable), claims to goods or services (for example, prepaid items), consumable goods (for example, supplies inventories), and marketable equity securities of another entity obtained or controlled as a result of past transactions or events."

This definition leads to changes in governmental accounting for two items--prepaid items and supplies inventories are now considered financial resources and are reported as assets when acquired and expenditures when used. Also under the old spending focus, we had to evaluate the financial resources to determine if they were "available spendable resources." If they were not, fund equity was reserved to show that all the assets were not available to finance next year's expenditures. The new definition of financial resources means that there will be fewer reserves of fund equity.

Financial resources are affected by revenues, operating expenditures, interfund transfers, and the acquisition, disposition, and long-term financing of capital assets (and of nonrecurring projects that have long-term economic benefits). However, financial resources, as reported in the operating statement, are not affected by debt financing of operations.

Government Fund Revenues

Governmental fund revenues come from taxes (property, sales, income, etc.), other nonexchange transactions (e.g., fines, fees, donations) and exchange transactions (e.g., user fees, investment earnings). The biggest change brought about by the statement is that the "available to finance current year expenditures" criterion of modified accrual can be forgotten.

For taxes the revenue recognition criteria becomes the following:

1. The underlying transaction or event has taken place; and

2. The government has demanded the taxes from the taxpayer by establishing a due date on or before the end of the period. However, taxpayer-assessed taxes with a due date within two months after the end of the period to allow for "administrative lead time" should be considered as having been demanded as of the end of the period.

Property taxes are generally levied to finance a particular budget period. That period is considered the "underlying event." Property tax revenues will be recognized in that budget period if the tax bills have been sent before the end of the period and the due date, the last day before penalties and interest start to accrue, falls in the period. Property taxes due after the budget period are revenue when due; property taxes received or receivable before the budget period are recorded as receivable and deferred revenue.

Sales tax revenue will be recognized on almost a cash basis. Cash for taxes on the year's sales received within two months after the end of the year is revenue of the year as are actual audit adjustments made during the year (or before statements are issued). Expected refunds of sales tax, if any, should be reported as a liability and revenues reduced accordingly.

Income tax revenue is also recognized on almost a cash basis. This includes cash for actual payments, withholdings collected and estimates made. Income tax revenue recognition is made interesting by the fact that the tax year (TY) end, and the government's fiscal year (FY) end, are often different by six months. Using individual income tax as an example, FY2 includes the last half of TY1 and first half of TY2. By the end of FY2 (or at least by the time statements are issued), most of the final settlements for TY1 (based on April 15, TY2 return), payments and refunds, will have been made or reported. These are called current final settlements and included in FY2 revenue. The unknown at the end of FY2 is the final settlements to be made in FY3 (April 15) for TY2 (related to income earned in the last half of FY2/first half of TY2). These are future final settlements and are not to be considered in determining FY2 revenue. Unless the government has structured over- demand into the withholdings and/or estimated payments, then the FY2 revenue should be reduced by, and a liability reported for, the amount of over-demand built into the January-June withholdings/estimates. This means that funds the government has borrowed from taxpayers interest free are reported as a liability, not revenue.

Accrual for Delinquent Taxes

The statement also requires an accrual for delinquent taxes. For taxpayer-assessed taxes, delinquent taxes are those that taxpayers are late in reporting or remitting. Calculating taxpayer-assessed delinquent taxes will not be easy. The amount is to be based on: 1) late payments received before statements are issued; 2) taxes reported, but not paid, before statements are issued; and 3) an estimate, based on historical trends, of the payments that will "trickle in" after the cut- off date for the statements. For all taxes the revenue and receivable should be reduced by an appropriate allowance for uncollectible amounts.

Other Revenue Sources

Revenues from fines should be recognized when the fine is paid, when the time expires for the fine to be contested or when a court imposes the fine. In most cases, revenues from fees will be recognized when paid or when due and there is no obligation for the government to make a refund. Fees for licenses that finance expenditures for a regulated activity during the period (e.g., state board of accountancy) may be deferred and allocated over that period of time.

Revenues from donations of financial assets (e.g., cash or investments) should be recognized when there is an enforceable legal claim to the donation and it is probable the donation will be received. Donations of capital assets are revenue only if the intention is to sell the asset immediately. Intention is shown by a sale or contract to sell before financial statements are issued. Other donated capital assets are recorded only in the General Fixed Asset Account Group.

Exchange transaction revenues are recognized when earned. This includes fees for services, investments, and operating leases. Dividends and interest received on investments (and on overdue taxes for that matter) are recognized when earned. Gains or losses are recognized when an investment is sold. Estimated losses on investments in securities are recognized in a fund's operating results if the market value drops below cost and either of the following situations exist:

* The decline in value is other than temporary; or

* The loss is probable in the future (e.g., the investment will be sold soon to meet cash flow needs).

If the investment is owned by one fund but the gains, losses or investment income, legally or contractually, belong to another fund, then the gains, losses or income are generally reported in the recipient fund.

Other Financing Sources

The account title "Other Financing Sources" is still used for the sale or capital lease of capital assets and interfund transfers. In the past all long-term debt to be used for general government purposes was recorded and reported as an "Other Financing Source." However, under the new standard, the accounting for the resources obtained from issuance of long-term debt has changed. Only long-term debt to be used for capital asset acquisition or for projects that have long-term economic benefit (e.g., hazardous waste clean-up) is an "Other Financing Source." The face amount of the debt and any issuance-premium or discount should be shown separately on the Operating Statement, not netted. The Board has not decided what to do with operating long-term debt, but it hopes to find an acceptable way to keep from accounting for it as an "Other Financing Source." Under certain circumstances, "retroactive" borrowing to finance capital assets originally paid for with existing resources are considered long-term capital debt.


Expenditures, generally, are recognized on the accrual basis. That statement may not sound any different from what was said about expenditures under modified accrual accounting, but there are some differences. As discussed earlier, pre-payments and supply inventories will now be recorded as assets not expenditures. Thus, for operating expenditures the meaning of expenditures is no longer the amounts paid during the period or payable from available financial resources. The operating statement will show the financial consequences of transaction/events in the period they take place. Thus accountability for interperiod equity is improved.

The accrual treatment of nonexchange operating expenditures is part of another project. These expenditures are for legislatively mandated transfer of resources to other governments or individuals, e.g., revenue sharing or welfare payments.

In some ways, FASB found expenditures harder to deal with than revenues, not because of difficulty in defining what an expenditure is, but because of not always knowing what to credit.

Compensated absences was one of the tricky issues. Basically FASB Statement 43 should be followed for recording expenditures, i.e., an expenditure is to be recognized when the benefits are earned if the benefits vest, but the Board could not decide what to do with the resulting liability. So the decision was delayed and transferred to a project on financial reporting. The Board intends to reconsider the accounting for compensated absences before Statement 11 becomes effective.

Principal and interest expenditures for general long-term capital debt will continue, until the capital reporting project is complete, to be recorded when due, unless resources have already been provided in the fund servicing the debt for payments early in the next year. If resources have been provided, then the expenditures and liability may be accrued in the current year. Any out-of-pocket issue costs or issue costs paid out of the proceeds should be reported as expenditures.

Operating debt, long-term and short-term, is handled in a different manner than capital debt. First, the issuance should not be reported on the operating statement except for issue costs, which would be an expenditure. Interest on operating debt should be recognized as interest accrues using the effective interest rate. Principal payments on operating debt are not treated as an expenditure. The GASB intends to treat operating debt as a liability, but guidance for the balance sheet reporting awaits a statement on financial reporting.

What to Credit

Thus, several controversial issues (compensated absences, operating debt, pension liabilities) will be handled in other projects. This leads to an interesting position. The statement gives complete guidance on how to record many transactions, but some transactions provide guidance on what to debit but not what to credit; for other transactions there is no guidance. That obviously will not work in practice, so the Board gave this statement an effective date of June 15, 1994, with no early application permitted, and pledged to resolve the hanging issues by the effective date. The Board has its work cut out for it between now and 1994. The decisions already made in Statement 11 will provide a foundation for the discussion of the remaining issues and hopefully make the other decisions easier.

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