P 5 11 Nonexchange Expenditures Are The Mirror Image Of None

P 5 11nonexchange Expenditures Are The Mirror Image Of Nonexchange

P. 5-11 Nonexchange expenditures are the mirror image of nonexchange revenues. A state government provided several grants to school districts and local governments during its fiscal year ending August 31. 1. On August 1, 2012, it announced a $2 million grant to a local school district for the purchase of computers. The district can spend the funds upon receipt. On September 15, 2012, the state mailed a check for the full amount to the district. The district spent $1.5 million on computers during fiscal 2013 (i.e., the year ending August 31, 2013) and expects to spend the remaining $0.5 million in fiscal 2014. 2. On the same date the state announced a $10 million grant to another school district for the acquisition of equipment. However, per the provisions of this grant the state will make payments only upon receiving documentation from the district that it has incurred allowable costs. In fiscal 2013, the district incurred and documented allowable costs of $8 million. Of this, the state paid only $7 million, expecting to reimburse the district for the balance early in fiscal 2014. 3. The state also announced a $5 million grant to a third school district, again for the acquisition of computers. The state will make annual five $1 million payments to the district, starting on September 15, 2013. The district is required to expend the funds in the fiscal year in which they are received. 4. Toward the end of fiscal 2013, it awarded a $500,000 contract to the accounting department of a local university to support a review of the state’s cost accounting system. The department intends to carry out the review during 2014 and issue its final report to the state in early 2015. Upon announcing the award, the state made an advance payment of $100,000 to the department. It intends to pay the balance when the department completes the project to the satisfaction of the state. a. Prepare the journal entries that the state would make in fiscal 2013 to record the awards in an appropriate governmental fund. Briefly justify the amount of expenditure that you recognized. b. What, if any, adjustment to the amount of expenditure recognized would the state have to make in preparing its government-wide statements? c. Describe briefly how the recipients would account, in both fund and government-wide statements for the awards.

Paper For Above instruction

The recognition and reporting of nonexchange revenues and expenditures are fundamental components of governmental accounting. These processes are governed by specific accounting standards that guide how governments record, measure, and disclose financial activities related to nonexchange transactions. This paper explores the accounting treatment for various grants issued by a state government to local entities, illustrating the journal entries required in governmental funds, adjustments needed in government-wide statements, and how recipients account for these awards.

Introduction

Understanding nonexchange transactions is crucial for governmental accounting because they involve the transfer or receipt of resources without a direct exchange of goods or services. These transactions typically include grants, shared revenues, and donations. Properly recognizing and reporting nonexchange revenues and related expenditures ensures transparent financial statements that accurately reflect a government’s fiscal activities and financial position. The Governmental Accounting Standards Board (GASB) provides specific guidelines on when and how to recognize nonexchange revenues and expenditures, emphasizing the importance of timing and eligibility criteria.

Case Analysis and Journal Entries in Governmental Funds

The example scenarios outlined by the state government illustrate different types of grants—immediate, conditional, and installment payments—that require distinct accounting treatments in governmental funds. In these funds, revenues are recognized only when they are measurable, available, and revenues are earned, while expenditures are recognized when the related liability is incurred.

Scenario 1: Grant for Computers - Immediate Receipt and Expenditure

The state announced and mailed a check of $2 million on September 15, 2012. The grant is unconditional; thus, the revenue recognition occurs when the funds are available and measurable—likely in fiscal 2013 when the district spent $1.5 million. Since the district can spend the funds upon receipt, the governmental fund should recognize the $2 million as revenue in fiscal 2013, with corresponding expenditures for the amount spent.

Journal entries:

• On receipt (September 15, 2012):
• debit Cash $2,000,000
• credit Nonexchange Revenue – Grant $2,000,000

• debit Expenditures $1,500,000
• credit Cash (or Accounts Payable if not paid yet) $1,500,000

The remaining $0.5 million, planned for expenditure in fiscal 2014, is recognized as a receivable or as a deferred inflow of resources in the governmental fund, depending on the government’s policies. However, in the fiscal year of expenditure, the fund focuses primarily on the amount spent and recognized as revenue in the fiscal year.

Scenario 2: Grant with Conditional Reimbursement - Incurred Costs

In this scenario, the state announces a $10 million grant, with the government only reimbursing allowable costs incurred and documented by the district. In fiscal 2013, the district incurred $8 million in allowable costs and received $7 million from the state. The journal entries include recording the costs incurred, the receivable, and the reimbursement received.

• Cost incurred and documented (fiscal 2013):
• debit Expenditures—Grant $8,000,000
• credit Accounts Payable or Cash (upon payment or approval) $8,000,000

• debit Cash $7,000,000
• credit Receivable—Grant $7,000,000

The amount payable to the district for the remaining allowable costs ($1 million) would be recorded as a receivable until reimbursed, aligning with the accrual basis of accounting used in government-wide statements.

Scenario 3: Multi-year Payments - Awarded but Not Fully Disbursed

The third grant involves five annual payments of $1 million, starting September 15, 2013, with the condition that funds are expended in the receipt year. For the initial payment, upon allocation and receipt, the government records the grant revenue; however, the expenditure is recognized only when the district expends the funds. If the district receives the funds but does not spend all in the same year, the unused portion remains as a deferred inflow of resources until spent.

In fiscal 2013, the government recognizes the revenue if the funds are available and measurably received. The initial journal entry is:

• debit Cash $1,000,000
• credit Nonexchange Revenue—Grant $1,000,000

The district accounts for the expenditure when funds are spent, reflecting usage in both fund and government-wide statements.

Scenario 4: Contract for Cost Review - Advance Payment

The state paid an advance of $100,000 to a university department for a review scheduled in 2014. The key issue is whether the government recognizes expenditure or revenue at the point of advance payment. Under GASB standards, an advance payment constitutes a deferred outflow or inflow until the work is performed. Therefore, in fiscal 2013, the state recognizes a prepaid expense or a deferred outflow of resources, not an expenditure.

Journal entry:

• debit Prepaid Expense or Deferred Outflow $100,000
• credit Cash $100,000

In subsequent periods, as the review is conducted and work is completed, the government recognizes expenditures accordingly.

Adjustments in Government-wide Financial Statements

The reporting in government-wide statements differs from governmental funds because it uses accrual accounting, recognizing receivables, payables, and expenses when incurred, regardless of cash flows. For example, costs incurred but not reimbursed are recognized as expenses, and receivables are recorded for amounts due but not yet received. The $8 million incurred for allowable costs in the second scenario would be recognized as an expense in government-wide statements, and any unpaid portion would be reflected as a receivable. Similarly, the $100,000 advance payment would be recorded as a prepaid expense or deferred outflow, and subsequent expenditures would amortize this amount as the work progresses.

Recipients’ Accounting Treatments

Recipient entities, such as school districts, record nonexchange revenues and expenditures in their fund and government-wide statements similarly but with distinctions based on timing and measurement. In fund statements, revenues are recognized when resources are available and measurable, often upon receipt, and expenditures are logged when incurred. In government-wide financial statements, entities recognize revenues when earned and expenditures when the related economic benefits are consumed or liabilities incurred, aligned with accrual accounting standards.

For example, when a district receives a grant for computers, it recognizes revenue upon receipt in fund statements if available, and in government-wide statements when the purchase or expenditure occurs. For reimbursement grants, the district recognizes costs as expenses and receivables when incurred, matching the government-wide standard.

Conclusion

The accounting and reporting of nonexchange transactions demand precise adherence to standards to ensure transparency and comparability. Governments must recognize revenues and expenditures in the appropriate period, reflecting economic realities and legal obligations. The distinction between governmental fund and government-wide statements reflects different measurement focus and timing, with the former emphasizing inflows and outflows and the latter emphasizing economic resources.

References

• GASB Statement No. 33, "Accounting and Financial Reporting for Nonexchange Transactions," Governmental Accounting Standards Board, 2011.
• GASB Statement No. 91, "Conduit Debt Obligations," Governmental Accounting Standards Board, 2020.
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