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 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 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). They are classified either as operating or nonoperating revenues. Operating revenues are generated by the primary activity of the fund. Conversely, nonoperating revenues are not generated by the primary activity of the fund, but 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 revenues that are directly attributable to a specific functional activity. GAAP requires these revenues to be presented separately in the appropriate functional areas, providing a calculation of net expense for each activity. This net expense often represents the level of support required from the government's own resources. Program revenues include fees collected from those who benefit from the program, grants, and other contributions required by the resource provider to support a specific activity.
Program revenues are reported on the statement of activities in the following three categories, if applicable:
Program revenues are reported at 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 for program revenues may be used.
All revenues are general revenues unless they are required to be reported as program revenues. General revenues are reported in the government-wide statement of activities after program revenues have been subtracted from functional expenses.
Classification of Revenues
Programs are financed from essentially four sources as follows (see exhibit 6):