Modified Accrual Recognition of Property Tax Revenue
The City of Fairview adopts its fiscal Year 2 budget and must record property tax activity for the year ended December 31, Year 2. The levy of $50,000,000 was assessed on January 1, Year 2, and bills were mailed. Collections during Year 2 are $46,000,000. Of the $4,000,000 receivable at year-end, $3,200,000 is expected to be collected within 60 days after year-end, and $800,000 is expected to be collected later, mostly in Year 3. Historically, 1.5% of the levy is uncollectible. The city has a 60-day availability period. Separately, the city received a $2,000,000 state grant restricted to road construction; $500,000 was spent in Year 2, and the state reimburses on a cost-reimbursement basis. The city also holds $1,000,000 of property taxes collected in advance for Year 3.
1. Compute property tax revenue recognized in the Year 2 governmental fund statements and in the government-wide statements, and explain the difference.
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Governmental funds (modified accrual): revenue is recognized when measurable and available. Available means collected within the period or within 60 days after year-end. Of the $4,000,000 receivable, only $3,200,000 is available. But the city must also consider collectibility: 1.5% of $50,000,000 = $750,000 is expected to be uncollectible. Tax revenue = $46,000,000 collected + $3,200,000 available = $49,200,000. The $800,000 not available is deferred inflow of resources, not revenue. The $750,000 allowance reduces the receivable; if the allowance exceeds the unavailable amount, the deferred inflow cannot exceed the net receivable.
Government-wide (full accrual): revenue is recognized when the tax is imposed (the lien date), regardless of availability. Revenue = $50,000,000 levy - $750,000 uncollectible = $49,250,000. The $800,000 is recognized even though collected later, because it is measurable and the underlying event (the levy) has occurred. The $750,000 difference between $49,250,000 and $49,200,000 plus the deferred timing reflects the modified-accrual availability constraint.
2. How should the $1,000,000 of taxes collected in advance for Year 3 and the $500,000 grant expenditure be reported?
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The $1,000,000 collected in advance is not revenue in Year 2 under either basis: the tax is not levied for Year 2 and the event has not occurred. In governmental funds it is a deferred inflow of resources (or a liability if refundable); on the government-wide statements it is also deferred. Do not net it against receivables.
The $500,000 grant: because the state reimburses on a cost-reimbursement basis, the eligibility requirement is met as allowable costs are incurred. Recognize $500,000 of grant revenue in Year 2 in both the governmental fund and government-wide statements. The unspent $1,500,000 is not recognized. If the grant were an advance payment rather than reimbursement, the timing test would defer recognition until the period of the grant. The restricted purpose affects fund balance classification in governmental funds (restricted) and net position (restricted) on the government-wide statements, not the amount of revenue.
3. The city's actuary reports that the annual required contribution to the pension plan is $6,000,000 but the city contributed only $5,000,000. How does this affect the two sets of statements?
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In the governmental funds, the expenditure is the amount contributed, $5,000,000, because pensions are recognized on the modified accrual basis when due and payable. The $1,000,000 shortfall is not a fund liability.
On the government-wide statements, the city reports its proportionate share of the net pension liability. The difference between the actuarially determined contribution and the amount paid, along with changes in the net pension liability, is recognized as pension expense or deferred outflows/inflows of resources. The $1,000,000 underfunding increases the net pension liability; it does not simply become a Year 2 expense in full. Deferred outflows/inflows arise from differences between expected and actual experience, changes in assumptions, and differences between projected and actual earnings, amortized over the average remaining service life. The key judgment: governmental fund reporting measures cash contributions, while government-wide reporting measures the accrual-based net pension liability and related deferrals.