Revenue: nonexchange and exchange transactions

Revenue is where governmental accounting departs most clearly from business accounting. A city's largest revenue, property tax, is imposed by law; its sales tax is collected by the state on its behalf; grants come from other governments that receive nothing in return; and only part of its revenue, such as water charges, comes from exchanges with customers. GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions (1998), classifies nonexchange revenues into four groups with different recognition rules, while exchange revenues follow accrual principles similar to business accounting. In governmental funds, every revenue must also be available. This lesson applies the rules to Aspen Ridge.

Four classes of nonexchange transactions

Statement 33 defines four classes. Derived tax revenues are taxes on exchange transactions, such as sales and income taxes: recognize them when the underlying exchange occurs. Imposed nonexchange revenues are taxes and fines imposed on non-governmental entities without an underlying transaction, such as property taxes: recognize an asset when there is an enforceable legal claim or when resources are received, and revenue in the period for which the tax is levied. Government-mandated nonexchange transactions occur when a higher level of government requires a lower one to perform a service and provides resources, and voluntary nonexchange transactions result from legislative or contractual agreements, such as most grants and private donations: for both, recognize revenue when all eligibility requirements, including time requirements, are met. Purpose restrictions do not delay recognition; they result in restricted net position.

In Nebraska, as in many states, the county assesses property and collects property taxes for all local governments, including the city, school district and other entities, then remits each government's share. Cities levy a rate per $100 of valuation within limits set by state law. Sales tax is a local option tax collected by the state Department of Revenue along with the state sales tax and remitted to the city monthly, about two months after the sales occur. Because both taxes are collected by others, the city must estimate amounts collected for its benefit but not yet received at year-end.

# Revenue recognition for the invented City of Aspen Ridge, Nebraska, fiscal year
# ended 30 September 2027 (thousands). Availability period for property taxes:
# 60 days; for other revenues the city's policy uses 90 days.
levy = 18_700                       # levied for FY2027 (imposed nonexchange)
allowance = 100                     # estimated uncollectible
collected_in_year = 18_100
collected_within_60_days = 300
later = levy - allowance - collected_in_year - collected_within_60_days

print("PROPERTY TAXES              Government-wide   General fund")
print(f"Revenue                     {levy - allowance:>15,}   {collected_in_year + collected_within_60_days:>12,}")
print(f"Deferred inflow (unavailable){'':>14}   {later:>12,}")

# Sales tax (derived tax revenue): recognized when the underlying sales occur.
remitted_by_state = {"Aug sales, received Oct": 640, "Sep sales, received Nov": 660}
receivable = sum(remitted_by_state.values())
print(f"\nSales tax receivable at year end {receivable:,} (available: received within 90 days)")

# Reimbursement grant (voluntary nonexchange with an eligibility requirement):
eligible_costs = 1_000
reimbursed_within_90_days = 750
print(f"Grant: government-wide revenue {eligible_costs:,}; "
      f"fund revenue {reimbursed_within_90_days:,}; "
      f"deferred inflow {eligible_costs - reimbursed_within_90_days:,}")

# Exchange revenue: water bills for September usage, billed in October
print("Utility fund: September usage billed in October is revenue of FY2027 (accrual).")

PROPERTY TAXES              Government-wide   General fund
Revenue                              18,600         18,400
Deferred inflow (unavailable)                          200

Sales tax receivable at year end 1,300 (available: received within 90 days)
Grant: government-wide revenue 1,000; fund revenue 750; deferred inflow 250
Utility fund: September usage billed in October is revenue of FY2027 (accrual).

The program applies the rules to three revenues. For property taxes, government-wide revenue is the full fiscal 2027 levy of $18.7 million less the $100,000 estimated to be uncollectible, or $18.6 million; the general fund recognizes only the $18.4 million collected during the year or within 60 days afterward, and reports the $200,000 collected later as a deferred inflow of resources for unavailable revenue. The $1.3 million of sales tax on August and September sales is revenue in both the fund and government-wide, because it will be received within the city's 90-day availability period. The reimbursement grant is recognized government-wide as costs are incurred, $1.0 million, but only $750,000 is available in the fund.

Grants and eligibility requirements

Most grants to local governments are voluntary or government-mandated nonexchange transactions. GASB Statement 33 lists four kinds of eligibility requirements: required characteristics of recipients; time requirements (the period when resources must or may be used); reimbursements (the recipient must incur allowable costs first); and contingencies (for voluntary transactions, such as a requirement to raise matching funds). Revenue is recognized when all are met. Resources received before the requirements are met are liabilities (unearned revenue) except for time requirements, which result in deferred inflows. For reimbursement grants, which are common for federal programs, revenue equals allowable costs incurred. Purpose restrictions, by contrast, do not delay revenue; they restrict net position until the resources are used.

The fund-level difference arises because availability applies to grants as well. The city's policy treats grant revenue as available if collected within 90 days after year-end; the state reimbursed $750,000 of the $1.0 million of costs within that period, so $250,000 is a deferred inflow in the general fund but revenue in governmental activities. Governments disclose their availability periods in the summary of significant accounting policies, and policies of 60, 90 or even 365 days for reimbursement grants are seen in practice.

Exchange transactions

Exchange revenues, such as water and sewer charges, recreation fees and permit fees, are recognized when the exchange takes place, on the accrual basis in the government-wide statements and proprietary funds, and when also available in governmental funds. Water bills for September usage that are sent in October are revenue of fiscal 2027 in the utility fund. GASB's revenue and expense recognition project has proposed a performance obligation model for exchange transactions, influenced by FASB ASC 606, but the proposal is not yet a standard. GASB has also clarified that a transaction is an exchange only if both parties receive value of approximately equal value; a nominal fee for a heavily subsidized service, such as a $5 youth sports registration, may be an exchange-like transaction, still reported as charges for services.

Special topics

Several special topics recur. Property taxes levied in fiscal 2027 for fiscal 2028 are deferred inflows of resources in both the fund and government-wide statements, because they relate to a future period. Tax abatements, such as property tax reductions granted to attract a business, are disclosed under GASB Statement No. 77, which applies whether the abatement is the city's own or another government's that reduces the city's revenue. Pass-through grants, which the city receives and passes to subrecipients, are generally revenue and expenditure of the city if it has administrative or direct financial involvement. On-behalf payments, such as a state paying pension contributions for city employees, are recognized as revenue and expenditure by the employer.

Tax refunds, appeals and allowances

Several practical issues affect property tax measurement. Property owners may protest their valuations to the county board of equalization and appeal further; if a protest succeeds, the county refunds part of the tax, reducing every taxing entity's share. Governments estimate refunds for pending protests and reduce revenue and receivables accordingly; Aspen Ridge records an estimated $90,000 of refunds for fiscal 2027 protests outstanding at year-end, within its $100,000 allowance. Tax abatements and tax increment financing (TIF), common in Nebraska, raise their own issues: under TIF, incremental property taxes in a redevelopment area are pledged to repay redevelopment bonds, and the city discloses the abatement and the pledged revenues. Delinquent taxes become liens, and the county may sell tax certificates to investors, which collects the tax for the city even though the property owner has not paid.

Revenue recognition also interacts with the budget. Nebraska limits property tax requests and the growth of restricted funds, so a city whose sales tax grows faster than expected may lower its levy or build fund balance within those limits. The accounting does not change: revenue is recognized when the standards say so, regardless of how the council plans to use it. But the budgetary comparison and MD&A explain the effect, and readers should not assume that a revenue windfall reduces taxes automatically.

A final point concerns disclosure. Governments disclose their revenue recognition and availability policies for each major source, receivables and their collectibility, deferred inflows by type, tax abatements under Statement 77, and pledged revenues that secure debt, such as the water and sewer charges pledged to the utility's revenue bonds. These disclosures help users understand how much of next year's revenue is already committed and how much depends on future decisions. For Aspen Ridge, the notes show $450,000 of unavailable revenue in the general fund, all of which the city expects to collect within the next fiscal year.

Comparing revenue sources shows how mix shapes risk. Property taxes are stable but limited by state law; sales taxes respond to the economy and shift with online sales rules; grants depend on decisions by other governments; and investment earnings depend on interest rates. A city that relies heavily on sales taxes, as many Nebraska cities do, should hold larger reserves against recessions, a point the GASB 102 risk disclosures can highlight.