Measurement focus and basis of accounting: modified accrual and the availability criterion

• Distinguish the current financial resources and economic resources measurement focuses
• Apply the measurable and available test to governmental fund revenues
• Determine when governmental fund expenditures are recognized for long-term liabilities
• Calculate unavailable revenue at year end

Two questions: what and when

Measurement focus decides what is measured. The economic resources focus, used in the government-wide, proprietary and fiduciary statements, measures all assets and liabilities, including capital assets and long-term debt. The current financial resources focus, used in governmental funds, measures resources that can be spent in the near term and the liabilities that will be paid from them.

Basis of accounting decides when transactions are recognized. The accrual basis recognizes revenue when earned (or, for nonexchange revenue, under Statement 33) and expenses when incurred. Governmental funds use the modified accrual basis, which Statement 34 paragraph 79 carries forward from NCGA Statement 1.

Revenue: measurable and available

Under modified accrual, revenues are recognized in the period in which they become susceptible to accrual, that is, when they are both measurable and available to finance expenditures of the period. Measurable means the amount can be reasonably estimated. Available means collected within the period or soon enough after it to pay liabilities of the period.

Each government sets its own availability period in its accounting policies and discloses it, for example 60 days for property taxes and a longer period for reimbursement grants. The auditor tests that the policy is applied consistently and that subsequent receipts were actually collected inside the window.

Revenue that is measurable and has met the Statement 33 recognition criteria but is not available is not revenue in the fund. The receivable is recorded with a deferred inflow of resources, usually labeled unavailable revenue. In the government-wide statements the same amount is revenue, which creates a reconciling item.

Expenditures

Governmental funds report expenditures, not expenses. The general rule is that expenditures are recognized when the related fund liability is incurred. The main exceptions:

• General long-term debt: principal and interest are recorded as expenditures when due, not as interest accrues.
• Compensated absences, pensions and OPEB: a liability and expenditure are recognized only to the extent the amount is normally expected to be liquidated with expendable available financial resources. Statement 68, for example, sets pension expenditures equal to amounts paid to the plan plus the change in amounts normally expected to be liquidated with expendable available financial resources.
• Capital outlay: buying or building a capital asset is an expenditure in full. No asset is recorded in the fund.
• Debt proceeds: issuing bonds produces an other financing source, not a liability, in the fund.

Why this matters on an audit

Cutoff work in a governmental fund is about the availability window as much as the fiscal year end. A tax receipt on day 58 and one on day 62 land in different places in the fund statements, but both are revenue in the government-wide statements. The common findings are:

• availability periods not disclosed, or different from what the system actually applies;
• reimbursement grant revenue recognized in the fund when cash came in months after year end;
• unavailable revenue never released when cash is collected the following year;
• compensated absences or claims liabilities recorded in full in the general fund rather than only the amount due and payable.

Build the subsequent receipts test around the policy dates and tie unavailable revenue to the receivables listing.

Proprietary and fiduciary funds

Enterprise funds, internal service funds and fiduciary funds do not use modified accrual. They follow the economic resources focus and full accrual basis, the same as the government-wide statements. A water utility records its bonds, its capital assets and depreciation, and the full compensated absences and net pension liability in its own fund statements. That is why the enterprise fund columns carry straight into business-type activities with few reconciling items, while governmental funds need the full bridge described in lesson 4. The fund accounting guide and lesson 6 on nonexchange revenue explain when the revenue recognition criteria themselves are met.

Property tax revenue in the general fund and the government-wide statements