Illustrative Examples (Basic Transactions and Sample Disclosures)

5.6 Illustrative Examples (Basic Transactions and Sample Disclosures)

Effective government financial reporting requires not only a solid grasp of measurement focuses and bases of accounting, but also an understanding of how mundane day-to-day transactions roll up into financial statement totals and disclosures. This section provides a set of illustrative examples of typical transactions undertaken by state and local governments—such as tax levies, intergovernmental grants, and bond issuances—and discusses how they are recognized, measured, and disclosed in governmental financial statements. These foundational concepts are instrumental to understanding how the detailed requirements of Governmental Accounting Standards Board (GASB) pronouncements manifest in practice.

Big Picture: Governmental Funds and Example Transactions

State and local governments often engage in a variety of activities reflected in different fund types, each with its own measurement focus and basis of accounting. The most common situational examples include:

• Property tax levy and collection (recorded in the General Fund).
• Issuance of general obligation bonds (often accounted for in a Capital Projects Fund).
• Receipt of intergovernmental grants (possibly recorded in a Special Revenue Fund).

Because each of these transactions can significantly affect the organization’s financial position and results of operations, government accountants must carefully track them using budgetary and fund accounting concepts. Budgetary accounting ensures compliance with legal requirements and appropriation limits, while fund accounting helps isolate activities to demonstrate accountability.

Below are illustrative government accounting transactions and corresponding guidance on recognition, presentation, and disclosures in the basic financial statements.

Budgetary Accounting Example

Before we delve into the specific revenue and financing transactions, consider a simplified example of how a state or local government might record its legally adopted budget in the General Fund. Under modified accrual accounting, governmental fund financial statements often begin the fiscal year with budgetary entries that do not appear in proprietary or fiduciary funds.

• Assume that for the upcoming fiscal year, total estimated revenues for the General Fund are $5,000,000; total appropriations are $4,300,000; and the difference is the estimated unused budgetary amount (often referred to as Budgetary Fund Balance).

Below is a sample journal entry:

┌─────────────────────────┬───────────────────────────────┐ │ Account │ Debit Credit │ ├─────────────────────────┼───────────────────────────────┤ │ Estimated Revenues │ $5,000,000 │ │ Appropriations │ $4,300,000 │ │ Budgetary Fund │ $700,000 │ │ Balance │ │ └─────────────────────────┴───────────────────────────────┘

Though this transaction does not conform directly to GAAP-based financial reporting (because it is purely budgetary), it helps track budgetary compliance. Classical fund accounting requires separate control accounts for such budget-related items.

Property Tax Levy and Collection

Overview

Local governments rely heavily on property taxes as a revenue stream. The general process involves:

1. Establishing and approving the annual budget, which includes the level of property tax to be levied.
2. Levying the tax on property owners, typically with the assistance of an assessment roll detailing valuations.
3. Recognizing revenue under modified accrual accounting.

GASB standards require governments to recognize property tax revenue in the period for which the levy is intended, provided the revenue is both measurable and available. Availability generally means collectible within either the current period or a specified number of days (often 60 days) after year-end.

Illustrative Journal Entries

Assume that on July 1, the start of the fiscal year, the county government levies $3,000,000 in property taxes. Historically, 3% is deemed uncollectible, so the net collectible amount is estimated at $2,910,000.

(1) Record the Levy
┌───────────────────────────┬───────────────────────────────┐ │ Account │ Debit Credit │ ├───────────────────────────┼───────────────────────────────┤ │ Taxes Receivable—Current │ $3,000,000 │ │ Allowance for │ $90,000 │ │ Uncollectible │ │ │ Accounts │ │ │ Revenues—Property │ $2,910,000 │ │ Taxes │ │ └───────────────────────────┴───────────────────────────────┘

Explanation:
• Taxes Receivable—Current is debited for the full amount of the levy.
• The Allowance for Uncollectible Accounts is credited for the expected 3% ($90,000).
• The difference ($2,910,000) is recorded to Revenues—Property Taxes.

(2) Collections of Current Taxes
Assume $2,700,000 of the $3,000,000 in levied property taxes is collected during the fiscal year.

┌───────────────────────────┬───────────────────────────────┐ │ Account │ Debit Credit │ ├───────────────────────────┼───────────────────────────────┤ │ Cash │ $2,700,000 │ │ Taxes │ $2,700,000 │ │ Receivable—Current│ │ └───────────────────────────┴───────────────────────────────┘

Explanation:
• Cash is debited for the amount actually received.
• Taxes Receivable—Current is credited, reducing the receivable.

Financial Statement Presentation

Under governmental fund statements (Balance Sheet—Governmental Funds and the Statement of Revenues, Expenditures, and Changes in Fund Balances), you would see the property tax revenue recognized in the period it meets the available criteria. Any unpaid taxes would remain in Taxes Receivable, reduced by the Allowance for Uncollectible Accounts. If a portion is not available soon enough to be recognized as revenue, it is deferred and presented under deferred inflows of resources.

Disclosures

Governments typically disclose:
• The nature and amount of property taxes levied.
• Rates applied to different classes of property.
• Collection rates and delinquency policies.
• Significant assumptions, if any, related to estimated uncollectibles.

Intergovernmental Grant Example

Overview

State and local governments frequently receive grants from higher-level governments (federal or state) for specific projects or for general support. Grants can be one-time or recurring. The timing of recognition and classification in the financial statements depends on eligibility requirements and time requirements specified in the grant.

Illustration

Assume a city receives notification of a $500,000 state operating grant, specifically restricted for road maintenance (a program reported in its Special Revenue Fund). The grant stipulates that the funds must be spent on eligible road maintenance costs within the fiscal year.

(1) Notification of Grant Award

No entry is made upon mere notification, as no asset or revenue is recognized until eligibility requirements are met.

(2) Expenditures Incurred

During the year, the city incurs $300,000 of eligible road maintenance costs.

┌───────────────────────────┬───────────────────────────────┐ │ Account │ Debit Credit │ ├───────────────────────────┼───────────────────────────────┤ │ Expenditures—Road │ $300,000 │ │ Maintenance │ │ │ Accounts Payable │ $300,000 │ └───────────────────────────┴───────────────────────────────┘

(3) Receipt of Cash from Grant

After submitting documentation, the city receives $300,000 for the reimbursed portion.

┌───────────────────────────┬───────────────────────────────┐ │ Account │ Debit Credit │ ├───────────────────────────┼───────────────────────────────┤ │ Cash │ $300,000 │ │ Intergovernmental │ $300,000 │ │ Revenues │ │ └───────────────────────────┴───────────────────────────────┘

Explanation:
• Expenditures—Road Maintenance is recognized when maintenance work is performed.
• Revenue is recognized only when eligibility requirements are met (i.e., allowable expenditures incurred).
• Because the grant is restricted for a specific purpose, this is typically recorded in a Special Revenue Fund.

Financial Statement Presentation

On the Statement of Revenues, Expenditures, and Changes in Fund Balances for the Special Revenue Fund, the $300,000 of grant revenue will be reported under intergovernmental revenues. Likewise, the city will disclose the remaining balance yet to be spent or earned if not all eligibility requirements have been satisfied.

Disclosures

GASB guidance suggests that governments disclose the following for significant grants:
• The grant purpose and any eligibility or time restrictions.
• Significant contingencies or compliance requirements.
• Balances of deferred inflows if conditions are not yet fully met.
• Recognition policies for revenue related to grants.

Bond Issuance Example

Overview

Long-term debt—such as general obligation bonds—is a major financing mechanism for capital projects at the state and local levels. The governmental funds recognize bond proceeds as Other Financing Sources when the bond is issued (modified accrual basis). In government-wide statements (full accrual), these proceeds are recorded as a liability (Bonds Payable).

Bond Issuance Journal Entry

Assume that a local county issues $2,000,000 of general obligation bonds at par to finance a new courthouse. The bond issuance is accounted for in a Capital Projects Fund.

┌────────────────────────────────────┬───────────────────────────────┐ │ Account │ Debit Credit │ ├────────────────────────────────────┼───────────────────────────────┤ │ Cash (Capital Projects Fund) │ $2,000,000 │ │ Other Financing Sources— │ $2,000,000 │ │ Bond Proceeds │ │ └────────────────────────────────────┴───────────────────────────────┘

Explanation: • In a Capital Projects Fund using the modified accrual basis, the proceeds from debt issuance are recognized and presented as “Other Financing Sources,” not as a long-term liability.
• In government-wide financial statements, the county would recognize a $2,000,000 increase in Cash as well as Bonds Payable for $2,000,000.

Financial Statement Presentation

• Fund-Level Statements: Outline the proceeds in the Statement of Revenues, Expenditures, and Changes in Fund Balances under “Other Financing Sources.”
• Government-Wide Statements: Present an increase in liabilities (Bonds Payable) and record interest expense over time.

Disclosures

Common disclosures related to bond issuances:
• Detailed descriptions of the bond purpose, maturity schedule, and interest rate.
• Debt service requirements by period.
• Legal or contractual limitations on further debt issuances.
• Any subjective acceleration clauses or debt covenants that might influence the timing of required payments.

Sample Disclosures in a Governmental Context

Proper note disclosures are crucial for transparent reporting to constituents, bondholders, and oversight agencies. While each government’s Comprehensive Annual Financial Report (often referred to as the Annual Comprehensive Financial Report, or ACFR) will contain a variety of disclosures specific to their circumstances, some standard disclosures include:

• Summary of Significant Accounting Policies: Detailing the basis of accounting used (modified accrual vs. accrual) by each fund type, the measurement focus, and key revenue recognition principles.
• Cash and Investments: Breakdown of allowable investments, custodial credit risk, concentration risk, and statutory or contractual limitations.
• Receivables and Property Taxes: Explanation of how property tax levies are computed, timing of recognition, and uncollectible allowance methodologies.
• Long-Term Liabilities: Summaries of bonds, notes, capital leases, and other debt obligations, including schedules of changes in long-term debt and future maturities.
• Intergovernmental Receivables: Summaries of grants, shared revenues, or other forms of external funding from higher-level authorities.
• Fund Balance or Net Position Classifications: Reconciliation between various funds’ fund balances and the net position classifications at the government-wide level.

In addition, notes should disclose compliance with legal budgets and any excess expenditures over appropriations.

Comprehensive Example of Combined Transactions

Below is a simplified scenario integrating property tax revenue, intergovernmental grant revenue, and bond proceeds for a local county during a fiscal period:

1. Budget Adoption (General Fund):
   • $5,000,000 in estimated revenues, $4,500,000 in appropriations, difference credited to Budgetary Fund Balance.
2. Property Tax Levy (General Fund):
   • $3,000,000 levied, 2% expected uncollectible.
3. Intergovernmental Grant (Special Revenue Fund):
   • $200,000 restricted grant for public safety.
4. Bond Issuance (Capital Projects Fund):
   • $1,500,000 par value, 4% interest, 10-year maturity.

When the government releases its financial statements:

• The General Fund will show property tax revenue (net of uncollectible) once it is considered available.
• The Special Revenue Fund will recognize intergovernmental revenue only upon meeting eligibility requirements.
• The Capital Projects Fund will display the bond proceeds as “Other Financing Sources.”
• Disclosures will detail each of these transactions, specifying the original budget, property tax policies, grant restrictions, and bond terms.

Visualizing the Fund Flows

Below is a simple conceptual diagram illustrating these flows among major governmental funds:

    flowchart LR
	    A[General Fund] -- Property Tax Rev -->
	    E((Government-Wide \n Statements))
	
	    B[Special Revenue Fund] -- Intergov. Grants -->
	    E((Government-Wide \n Statements))
	
	    C[Capital Projects Fund] -- Bond Proceeds -->
	    E((Government-Wide \n Statements))
	
	    subgraph Governmental Activities
	      A
	      B
	      C
	    end

In the government-wide statements, each fund’s transactions are converted to the economic resources perspective under accrual accounting, consolidating (or adjusting) entries for long-term liabilities, capital assets, and so forth.

Common Pitfalls

• Misapplication of the “available” criterion for revenue recognition in governmental funds, leading to premature or delayed recognition of tax or grant revenue.
• Failure to track restricted grant funds in a specialized fund, causing confusion about compliance.
• Omitting or understating allowance for uncollectible accounts, overstating net property tax revenue.
• Inadequate disclosures on debt issuances, particularly on debt covenants and compliance requirements.
• Improper classification of bond proceeds or ignoring bond premiums/discounts in the appropriate fund.

Best Practices

• Implement robust internal controls to track property tax receivables and ensure timely recognition of revenue, deferrals, and write-offs.
• Maintain a centralized grants management system so that each grant’s eligibility requirements, time restrictions, and expenditures are carefully monitored.
• Reconcile Capital Projects Fund bonding transactions with the government-wide statements to ensure consistency in reporting outstanding debt.
• Disclose relevant policies and assumptions that underlie financial estimates (e.g., uncollectible percentages, synergy with budget adoption, and compliance with legal restrictions).
• Provide regular training to accounting and finance staff on the differences between fund-level and government-wide reporting, including how to prepare the necessary reconciliations.

References for Further Exploration

• Governmental Accounting Standards Board (GASB) Codification, Sections 1600 (Basis of Accounting), 2300 (Notes to Financial Statements), and 3300 (Fund Accounting).
• Government Finance Officers Association (GFOA) Best Practices and Advisories on Budgeting, Grants Management, and Investment Policies.
• “Governmental Accounting, Auditing, and Financial Reporting (GAAFR)” by the GFOA—a comprehensive resource on state and local governmental accounting.
• GASB Statement No. 34 for guidance on government-wide financial statements.

State and Local Government Funds: Master the Basics Quiz

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