RECOGNITION AND MEASUREMENT—GENERAL PRINCIPLES

Governmental-type funds are basically budgetary devices. For internal purposes, the accounting records need to provide data to manage the current budget and prepare future budgets. But gov- ernmental budgets have a short-term horizon, and standards developed for accounting within the governmental-type funds have been influenced significantly by a budgetary perspective. To grasp the details of accounting recognition and measurement in the governmental-type funds, we need to look at the accounting standards in light of some budgetary thinking.

• Focus on spendable resources. From the perspective of the budget maker, resources held in governmental-type funds have utility only to the extent they can be spent to meet current budgetary needs. Resources that can be spent currently are financial resources, like cash and resources convertible to cash in the near term, such as investments, taxes receivable, and amounts due from other funds and other governments. So if a fund’s resources are used to acquire capital assets, the assets are available to meet program needs, but they are not available for current spending unless sold and converted to financial resources. Capital assets are not recorded in governmental-type funds because they are not financial resources available for current spending. Most governments also account for the acquisition of sup- plies as if consumed when purchased.

• Revenues recognized if resources are “available.” The conservative budget maker is con- cerned with the ability to convert taxes receivable to cash soon enough to pay current bills. Hence, from a revenue perspective, the word current (in the term current financial resources ) generally covers a shorter time frame than the 1-year period used in private enterprise to

1 _{As this edition of the text was being prepared, the GASB was in the early stages of developing a Concepts Statement on}

recognition and measurement. (Concepts Statements are road maps for future standards setting.) Because of inconsisten- cies in the current financial resources measurement focus model, some of which are noted in this chapter, the GASB was considering replacing the model with a “near-term financial resources measurement focus.” The outcome of the due pro- cess and resulting GASB deliberations is unknown. Conceivably, some of the inconsistencies may be eliminated in future accounting standards without dealing with the more fundamental issues inherent in the modifications to accrual account- ing resulting from the measurement focus.

distinguish current from noncurrent. Under GASB standards, governments recognize rev- enues only to the extent that they are “ measurable and available to finance expenditures of the fiscal period;” the standards define available to mean “collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period.” 2 As we will see shortly, there is some inconsistency in the revenue recognition standards because the period of time “soon enough thereafter” is explicitly defined for real property tax revenues, but not for other revenues.

• Expenditure budgeting on a cash or near-cash basis. If you are familiar with the govern- mental budget process, you are aware of the problems encountered in balancing budgets, particularly in times of economic contraction. It is not uncommon to hear about balancing the budget through gimmicks, such as budgeting for revenues that are not likely to materi- alize or anticipating delayed payment of bills. Depending on the fiscal circumstances, a government may choose not to finance certain types of expenditures, such as pensions and retiree health care benefits, in the years the benefits are earned by the employees. This is possible because there is a long time lapse between the earning of the benefits and the actual payment to or on behalf of the employees. When that occurs, the governments are not budgeting for all expenditures attributable to the budget period.

• Expenditures accrued if liabilities are incurred and “normally” paid from current finan-

cial resources. GASB standards state that “in the absence of an explicit requirement to do

otherwise, a government should accrue a governmental fund liability in the period in which the government incurs the liability.” 3 Depending on the circumstances, however, the “requirement to do otherwise” can be significant. As a result, the liabilities reported in the General Fund and Special Revenue Funds are generally those that will be paid shortly after the start of the next year. Major expenditures and corresponding liabilities may not be rec- ognized simply because the government chooses not to budget for them and finance them in the year the obligation is incurred.

The modifications to accrual accounting relate to the manner in which long-term debt is accounted for in the funds. GASB standards declare that, except for long-term debt expected to be paid from proprietary and fiduciary funds, the “unmatured long-term indebtedness of the government . . . is general long-term debt and should not be reported as liabilities in governmental funds.” “General long-term debt” is then defined to include not only debt arising from the issu- ance of general obligation bonds, but also “noncurrent liabilities on . . . compensated absences, claims and judgments, pensions . . . and other commitments that are not current liabilities prop- erly recorded in governmental funds.” 4 In short, certain liabilities—and the expenditures creating those liabilities—are omitted from the funds. (As we will see in Chapter 10 , those liabilities are reported in a separate set of financial statements called government-wide financial statements.)

What types of liabilities are recorded in the funds? According to the standards, (1) those that “once incurred, normally are paid in a timely manner and in full from current financial resources— for example, salaries, professional services, supplies, utilities, and travel” 5 and (2) those that have “matured” and are “normally expected to be liquidated with expendable available financial resources.” 6

2 _{GASB Cod. Sec. 1600.106.} 3 _{GASB Cod. Sec. 1600.119.} 4 _{GASB Cod. Sec. 1500.103.} 5 _{GASB Cod. Sec. 1600.119.} 6 _{GASB Cod. Sec. 1600.122.}

We covered the accruals resulting from the first type in Chapter 4 . But the second type creates exceptions to accrual accounting, and as a result, significant expenditures and liabilities that would be reported on the accrual basis of accounting are not reported under the modified accrual basis of accounting. We will discuss this matter in greater detail shortly, when we deal with the specifics.