Accounting Montana Operations Manual Policysfsd.Mt.gov/Portals/24/320 Revenues Receivables Debt...

320 Revenues Receivables Debt of 42

Montana Operations Manual

Policy

Category Accounting

Effective Date 07/01/2004

Last Revised Not Approved Yet

Issuing Authority

Department of Administration State Financial Services Division

320 Revenues Receivables Debt

I. Purpose This policy provides descriptions and accounting examples of revenues, receivables, and debt collection as applied to governmental accounting.

II. Scope This policy applies to all state agencies and institutions, excluding community colleges.

III. Outline IV. Revenue Transactions – Introduction V. Exchange and Exchange-Like Revenue Transactions VI. Non-Exchange Revenue Transactions VII. Pass-Through Grants, SNAP, and On-Behalf Payments for Fringe Benefits and Salaries VIII. Unearned Revenue, Unavailable Inflows of Resources, Deferred Inflows of Resources, and Deferred Outflows of Resources IX. Revenue Abatements X. Receivables XI. Allowance for Uncollectible Accounts XII. Collection of Receivables XIII. Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues XIV. Treasury Offset Program (TOP) – State Agencies as Debtors

IV. Revenue Transactions – Introduction Governments engage in two types of revenue transactions: (1) exchange and exchange-like transactions, and (2) non-exchange transactions. In an exchange and exchange-like transaction, each party receives and gives up essentially equal


values. In a non-exchange transaction, the parties give (or receive) value without directly receiving (or giving) equal value in exchange.

A. Characteristics of a Revenue Transaction When the State enters into a revenue transaction, it is necessary to identify various characteristics of the transaction. Proper identification of these characteristics will determine the guidance that should be followed when accounting for the transactions. 1. Identify the types of resources being exchanged

The guidance in this policy regarding exchange and exchange-like transactions, and non-exchange transactions applies only to transactions involving financial resources (other than supplemental nutrition assistance program (SNAP) or on-behalf payments for fringe benefits and salaries – see below) or capital resources. This policy does not apply to transactions involving other types of resources, such as contributed services (or in-kind donations). The Governmental Accounting Standards Board (GASB) has not issued any guidance on these types of transactions but may in the future. SNAP and on-behalf payments for fringe benefits and salaries have special accounting rules that are discussed later in this policy. The general guidance in this policy regarding exchange and exchange-like transactions, and non-exchange transactions should not be applied to these types of transactions.

2. Identify the parties to the transaction First, the parties to the transaction must be identified and categorized. For transactions between parties within the primary government, the guidance in Montana Operations Manual (MOM) Policy 345 – Interfund Activities, should be followed. Transactions within the primary government (referred to as “inter-fund activities”) must be categorized as either: • Amounts owing between funds, including

o Inter-fund loans o Inter-fund advances o Due to/from other funds

• Inter-fund reimbursements • Inter-fund services provided and used • Inter-fund transfers The guidance on revenue recognition in this policy applies only to transactions between external parties. For this purpose, component units are defined as external parties. Therefore, a transaction between the primary government and a component unit or a transaction between two component units should follow the guidance in this policy.

3. Categorize the type of revenue Once the transaction is identified as occurring between external parties, the revenue must be categorized into (1) exchange and exchange-like transactions, or (2) non-exchange transactions. If the transaction is identified as a non-exchange transaction, the transaction must be further identified as


belonging to one of four broad classes (these classes are discussed in detail later in this policy).

4. Identify the fund type In addition to identifying the parties to the transaction, and the type of transaction, state agencies must also identify the type of fund that the transaction will be recorded in. This is because the basis of accounting (which is determined by the fund type) may affect the accounting entries that are required (due to modified versus full accrual accounting differences).

5. Revenue recognition criteria Depending on the fund type, there are certain criteria that must be met for revenue recognition. Definitions are as follows:

• Realizable: revenue is considered realizable when it is probable the amount will be collected

• Measurable: revenue is considered measurable and realizable if: o The precise amount is known because the transaction is

completed, or o There is enough information to provide a reasonable, although

not necessarily precise, estimate of the net realizable revenue to be received. Experience often provides a basis for determining a reasonable estimate.

• Earned: revenue is considered to have been earned when the exchange of goods or services has taken place. Refer to the specific guidance below for more information on when specific type of transaction should be considered earned. If revenue is unearned, it should be recorded as unearned revenue.

• Available: collectible within the current fiscal year or soon enough thereafter to be used to pay liabilities of the current fiscal year. Revenue is considered available if any of the following criteria are met:

o It has actually been received and deposited in the state treasury during the fiscal year.

o The revenue is in the possession of a collecting agent on the last day of the fiscal year (June 30) and will be received by the State within 60 days after June 30.

o The revenue is due for the fiscal year ending June 30, but the payer is allowed an administrative lead time of no more than 60 days to process the paperwork to calculate the liability and make the remittance to the State.

o The revenue is normally received within 60 days after June 30, but due to highly unusual circumstances it has not been received by the State within 60 days after June 30. It should be received by the agency shortly after the 60-day period.


o The revenue is for federal funds with reimbursable grants and a legal, irrevocable commitment from the federal government exists to pay expenses incurred.

Amounts that are either unearned or unavailable should be recorded as either unearned or unavailable inflows of resources, as appropriate, under the modified accrual basis of accounting. However, unavailable inflows of resources that are recorded in the Actuals ledger should be reversed and recorded as revenue in the Entitywide ledger.

V. Exchange and Exchange-Like Revenue Transactions Exchange and exchange-like transactions refer only to external events in which something of value (benefit) passes between two or more parties. An exchange-like transaction, in contrast to a "pure" exchange transaction, is one in which the values exchanged, though related, may not be quite equal or in which the direct benefits may not be exclusively for the parties to the transaction. Nevertheless, the exchange characteristics of the transaction are strong enough to justify treating the transaction as an exchange for accounting recognition. For example, most fees for regulatory licenses and permits would qualify as exchange-like transactions, as do some types of grants and donations. If an entity’s willingness to enter into a transaction is predicated on receiving a significant potential benefit, then the transaction would qualify as an exchange-like transaction. If revenues related to exchange and exchange-like transactions meet the revenue recognition criteria, the transaction should be recognized as soon as the exchange has occurred.

A. Exchange and Exchange-Like Transactions – Modified Accrual Funds Governmental funds operate under the current financial resources measurement focus. This involves the recognition of near-term inflows and outflows of financial or spendable resources. In the Actuals ledger, the application of the accrual basis of accounting must be modified so the fund’s activity reflects transactions, events, and interfund activity that affect inflows and outflows of financial resources in the near future. This basis of accounting is commonly referred to as the modified accrual basis of accounting. The State of Montana uses the Entitywide ledger to convert governmental funds from the modified accrual basis to the full accrual basis of accounting. In modified accrual funds, exchange and exchange-like revenues are recognized when they meet all four of the following criteria in the order shown:

• Realizable • Measurable • Earned • Available

1. Earning criteria for multi-year license and permit revenue in modified accrual funds.


A multi-year license or permit is defined to include any license or permit issued for a period of greater than one year with periodic renewal required. In the case of multi-year licenses and permits, the exchange of goods or services is presumed to occur over the time period for which the license or permit is valid, and the revenue should generally be considered to have been earned equally over that same time period. In some cases however, recognizing multi-year license/permit revenue at the time the license/permit is issued, may not result in materially different amounts of revenue recognized each fiscal year. When the fiscal year results are not materially different under either approach, the license/permit revenue is considered to have been earned when the license/permit is issued. Each state agency that records revenue related to multi-year licenses and permits should complete an analysis to determine the appropriate revenue recognition approach. The results of the analysis should be retained by the agency, and updated as necessary. Professional judgment should be used by agencies to determine materiality.

B. Exchange and Exchange-Like Transactions – Full Accrual Funds Proprietary and fiduciary fund types use the economic resources measurement focus and the full accrual basis of accounting. In full accrual funds, exchange and exchange-like revenues are recognized when they meet all three of the following criteria in the order shown:

• Realizable • Measurable • Earned

Availability is not a requirement of revenue recognition under the full accrual basis of accounting. Therefore, revenue should never be deferred based on availability under the full accrual basis of accounting.

VI. Non-Exchange Revenue Transactions In a non-exchange transaction, a government gives (or receives) value without directly receiving (or giving) equal value in return. There are four classes of non-exchange transactions as specified by GASB Statement No. 33 – Accounting and Financial Reporting for Nonexchange Transactions (GASB 33):

• Derived tax revenues, which result from assessments imposed on exchange transactions (e.g., income taxes, sales taxes, and other assessments on earnings or consumption)

• Imposed non-exchange revenues, which result from assessments imposed on nongovernmental entities, including individuals (e.g., property taxes and fines), other than assessments on exchange transaction

• Government-mandated non-exchange revenues, which occur when a government at one level provides resources to a government at another level


and requires the recipient to use the resources for a specific purpose (e.g., federal programs that state or local governments are mandated to perform)

• Voluntary non-exchange revenues, which result from legislative or contractual agreements, other than exchanges, entered into willingly by the parties to the agreement (for example, certain grants and private donations)

The following table shows common examples of each type of non-exchange revenue:

Type of transaction

Examples of transaction Using full accrual accounting, recognized as revenue when

Derived tax revenue

Corporate income tax, individual income tax, motor fuels tax, alcoholic beverages tax, coal tax

Underlying exchange transaction occurs

Imposed non-exchange revenue

Estate tax, gift tax, most fines and forfeitures, property taxes

There is an enforceable legal claim, provided the establishment of that claim does not precede the period with which the revenues are associated *

Government-mandated non-exchange revenue

Federal mandated grant programs run by the State such as Medicare or Medicaid

Eligibility requirements are met

Voluntary non-exchange revenue

Certain grants and most donations/pledges

Eligibility requirements are met

* Property tax revenues are required to be recognized in the period for which the taxes are levied, even if an enforceable legal claim only arises in the subsequent period (subject to the availability period in governmental funds).

A. Derived Tax Revenues – Modified Accrual Funds Derived tax revenues result from assessments imposed on exchange transactions (for example, income taxes, sales taxes, and other assessments on earnings or consumption). In modified accrual funds, derived tax revenues are recognized when they meet the following four criteria in the order shown:


o For example, income taxes should be recognized as revenue as soon as the underlying income is earned, and the related resources become available to finance expenditure. Resources received in advance of the underlying exchange transaction occurring should be recorded as unearned revenue. Income taxes should be recorded net of any refundable amounts.

• Available


B. Imposed Non-Exchange Revenue – Modified Accrual Funds Imposed non-exchange revenues result from assessments imposed on nongovernmental entities, including individuals (e.g., property taxes and fines), other than assessments on exchange transactions. In modified accrual funds, imposed non-exchange revenues, other than property taxes, are recognized when they meet the following four criteria in the order shown:


o The revenue meets any time restrictions that arise when resource providers or enabling legislation require that the State use the resources in a specific time period or requires that they not be used until a specified date or event has occurred. If the State receives the asset before the specific time period, it should record the asset and record unearned revenue rather than revenue. If there are no time restrictions, the State should recognize revenue in the fiscal year when an enforceable legal claim to the assets arises or when the resources are received, whichever occurs first.

• Available 1. Property taxes - modified accrual funds

Property taxes are considered imposed non-exchange revenue; however, the recognition criteria are a little different than for other imposed non-exchange revenues. Property taxes are required to be recognized in the period for which the taxes are levied, whereas other imposed non-exchange revenues must be recognized in the period in which an enforceable legal claim arises, and the related resources are available to the government. In modified accrual funds, property tax revenues are recognized when they meet the following five criteria in the order shown:


o The revenue meets any time restrictions that arise when a resource provider requires that the State use the resources in a specific time period or requires that they not be used until a specified date or event has occurred. If the State receives the asset before the specific time period, it should record the asset and record a deferred inflow of resources rather than revenue.

• The revenue is required to be recorded in the fiscal year for which the taxes are levied, regardless of whether an enforceable legal claim arises in a subsequent fiscal year.

• Available C. Government-Mandated and Voluntary Non-Exchange Transactions –

Modified Accrual Funds


Revenues from government-mandated non-exchange transactions arise when a governmental entity provides resources to an entity that is at a lower level than the governmental entity that is providing the resources, and the provider entity requires the receiving entity to use the resources for a specific purpose or purposes established in the provider’s legislation. This includes when the federal government makes resources available to the State of Montana. Revenues from voluntary non-exchange transactions arise from legislative or contractual agreements, other than exchanges, entered into willingly by two or more parties. The principal characteristics of voluntary non-exchange transactions are (1) they are not imposed on the provider or the recipient, and (2) fulfillment of eligibility requirements is essential for a transaction (other than the provision of cash or other assets in advance) to occur. Examples of voluntary non-exchange transactions include donations, some entitlements, and certain grants. The accounting for government-mandated and voluntary non-exchange transactions are almost exactly the same, with the exception of eligibility requirement below. In modified accrual funds, government-mandated and voluntary non-exchange revenues are recognized when they meet the following four criteria in the order shown:

• Realizable • Measurable • Earned. One or more of the following eligibility requirements must be

met: o The recipient (and secondary recipients, if applicable) has the

characteristics specified by the provider. o Time requirements specified by enabling legislation or the

provider have been met. This is the period when the resources are required to be used (sold, disbursed, or consumed) or when use is first permitted has begun, or the resources are being maintained intact, as specified by the provider.

o The provider offers resources on a reimbursement ("expenditure-driven") basis and the recipient has incurred allowable costs under the applicable program.

o The provider's offer of resources is contingent upon a specified action of the recipient and that action has occurred. For example, the recipient is required to raise a specific amount of resources from third parties or to dedicate its own resources for a specified purpose and has complied with those requirements (applies only to voluntary non-exchange transactions).

• Available D. Derived Tax Revenues – Full Accrual Funds

Derived tax revenues result from assessments imposed on exchange transactions (for example, income taxes, sales taxes, and other assessments on earnings or consumption).


In full accrual funds, derived tax revenues are recognized when they meet the following three criteria in the order shown:


o The underlying transaction the tax is based on has occurred. For example, income taxes should be recognized as revenue as soon as the underlying income is earned. Income taxes should be recorded net of any refundable amounts.

E. Imposed Non-Exchange Revenue – Full Accrual Funds Imposed non-exchange revenues result from assessments imposed on nongovernmental entities, including individuals (for example, property taxes and fines), other than assessments on exchange transactions. In full accrual funds, imposed non-exchange revenues, other than property taxes, are recognized when they meet the following four criteria in the order shown:


o The revenue meets any time restrictions imposed by enabling legislation that arise when a resource provider requires that the State use the resources in a specific time period or requires that they not be used until a specified date or event has occurred. If the State receives the asset before the specific time period, it should record the asset and record deferred inflow of resources rather than revenue.

• The State has established an enforceable legal claim to a provider’s resources.

1. Property taxes - full accrual funds Property taxes are considered imposed non-exchange revenue; however, the recognition criteria are a bit different than for other imposed non-exchange revenues. Property taxes are required to be recognized in the period for which the taxes are levied, whereas other imposed non-exchange revenues must be recognized in the period in which an enforceable legal claim arises, and the related resources are available to the government. In full accrual funds, property tax revenues are recognized when they meet the following four criteria in the order shown:


o The revenue meets any time restrictions imposed by enabling legislation that arise when a resource provider requires that the State use the resources in a specific time period or requires that they not be used until a specified date or event has occurred. If


the State receives the asset before the specific time period, it should record the asset and record deferred inflow of resources.

• The revenue is required to be recorded in the fiscal year for which the taxes are levied, regardless of whether an enforceable legal claim arises in a subsequent fiscal year.

o If resources associated with property taxes are received or reported as receivable before the period for which they are levied, they should be reported as deferred inflows of resources.

F. Government-Mandated and Voluntary Non-Exchange Transactions – Full Accrual Funds Revenues from government-mandated non-exchange transactions arise when a governmental entity provides resources to an entity that is at a lower level than the governmental entity that is providing the resources, and the provider entity requires the receiving entity to use the resources for a specific purpose or purposes established in the provider’s legislation. This includes when the federal government makes resources available to the State of Montana. Revenues from voluntary non-exchange transactions arise from legislative or contractual agreements, other than exchanges, entered into willingly by two or more parties. The principal characteristics of voluntary non-exchange transactions are (1) they are not imposed on the provider or the recipient, and (2) fulfillment of eligibility requirements is essential for a transaction (other than the provision of cash or other assets in advance) to occur. Examples of voluntary non-exchange transactions include donations, some entitlements, and certain grants. The accounting for government mandated and voluntary non-exchange transactions are almost exactly the same, with the exception of eligibility requirement below. In full accrual funds, government-mandated and voluntary non-exchange revenues are recognized when they meet the following three criteria in the order shown:

• Realizable • Measurable • Earned. One or more of the following eligibility requirements must be

met: o The recipient (and secondary recipients, if applicable) has the

characteristics specified by the provider. o Time requirements specified by enabling legislation or the

provider have been met. This is the period when the resources are required to be used (sold, disbursed, or consumed) or when use is first permitted has begun, or the resources are being maintained intact, as specified by the provider.




G. Medicare Part D – Retiree Drug Subsidy One of the provisions of Medicare Part D provides sponsors of post-employment healthcare plans the opportunity to receive a payment from the federal government, referred to as the Retiree Drug Subsidy Program (RDS), if the sponsor’s plan provides a prescription drug benefit that is actuarially equivalent to the Medicare Part D benefit. 1. Payment received from federal government

Payments made to an employer are properly classified as voluntary non-exchange transactions and should be accounted for as revenue. Employers should not reduce their OPEB cost for the Medicare Part D - RDS payments received.

VII. Pass-Through Grants, SNAP, and On-Behalf Payments for Fringe Benefits and Salaries GASB Statement No. 24 – Accounting and Financial Reporting for Certain Grants and Other Financial Assistance (GASB 24), establishes standards for certain grants and other financial assistance that falls into one of the following three categories:

• Pass-through grants • SNAP • On-behalf payments for fringe benefits and salaries

A. Pass-Through Grants Pass-through grants include any financial assistance received by a governmental entity to transfer to, or spend on behalf of, a secondary recipient. GASB 24 requires recipient governments to report cash pass-through grants in their financial statements. The agency that initially receives the financial assistance is the pass-through entity. The agency that receives the financial assistance from the pass-through entity is the sub-recipient. The characteristics indicative of a sub-recipient are when the agency receiving the financial assistance from another agency:

• Determines who is eligible to receive the financial assistance • Has its performance measured against whether the objectives of the financial

assistance program are met • Is responsible for decision making regarding the financial assistance program • Is responsible for adherence to applicable financial assistance program

compliance requirements • Uses funds to carry out the financial assistance program as compared to

providing the goods and/or services for the financial assistance program


Pass-through grants should be recorded as operating transfers when the money is moved to/from another business unit or fund, if a component unit is not involved. For further information, see MOM Policy 345 – Interfund Activities, Section X.G – Sub-grants with other business units or funds. If a component unit is involved, then use the guidance in MOM Policy 345, Section X.A – Intra-entity activity with or between component units. Only in rare instances, when the recipient government functions only as a cash conduit, should a pass-through grant be accounted for in a custodial fund (07XXX). A recipient government serves only as a cash conduit if it merely transmits grantor-supplied moneys without having administrative or direct financial involvement in the program. Activities constituting administrative involvement include, but are not limited to:

• Monitoring secondary recipients for compliance with specific requirements established by the program

• Determining which secondary recipients are eligible for grant payments (even if eligibility criteria are established by the provider government)

• Exercising some discretion in determining how resources are to be allocated Both pre-grant activities and post-grant activities should be evaluated to determine whether the recipient government is exercising administrative involvement in the grant program. Activities constituting direct financial involvement include, but are not limited to:

• Recipient governments financing some direct program cost by providing matching funds for a grantor-imposed match requirement

• Recipient government being responsible for disallowed costs See the applicable sections of this policy on government-mandated and voluntary non-exchange transactions for the timing of recognition of revenue for a pass-through grant.

B. Supplemental Nutrition Assistance Program (SNAP) GASB 24 requires that receipts and disbursements under the SNAP program be recorded in the State’s financial records. Revenue and expenditures of an equal amount should be recognized simultaneously when benefits are distributed to the SNAP recipient by the State or the State government's agent. The State of Montana has an Electronic Benefit Transfer (EBT) System for the delivery of SNAP benefits. Under the EBT system, the distribution of benefits is assumed to occur when an individual uses the benefit card at a point-of-sale terminal in a retail establishment. In an EBT system, there generally would not be an inventory balance to report at year-end. However, if there is, it should be classified as cash offset with unearned revenue. This activity will be recorded in a federal special revenue fund as budgeted revenue and expenditures.

C. On-Behalf Payments for Fringe Benefits and Salaries GASB 24 requires revenue and expenditure recognition and certain disclosures to be made regarding on-behalf payments for fringe benefits and salaries. GASB 24 defines on-behalf payments for fringe benefits and salaries as direct


payments made by one entity (the paying entity or paying government) to a third-party recipient for the employees of another, legally separate entity (the employer entity or employer government). This includes payments made by governmental entities on behalf of nongovernmental entities and payments made by nongovernmental entities on behalf of governmental entities, and may be made for volunteers as well as for paid employees of the employer entity. On-behalf payments for fringe benefits and salaries include pension plan contributions, employee health and life insurance premiums, and salary supplements or stipends. 1. Financial reporting by the employer governmental entity

GASB 24 requires that on-behalf payments made by the paying governmental entity be recognized both as an expenditure or expense and as revenue by the employer governmental entity. The specific amount to be recorded depends on whether the employer government is legally responsible for payment of the fringe benefit or salary. When the employer government is not legally responsible for the payment, the amount to be recorded is determined by the amount actually paid by the paying governmental entity. For example, assume a state government makes a $100,000 contribution to the state pension fund on behalf of a locality; the locality would simultaneously record an expenditure or expense of $100,000 and an equal amount of revenue. When the employer government is legally responsible for the payment, it should follow accounting standards for that type of transaction to recognize expenditures or expenses and related liabilities or assets. Employer governments should obtain information about the amount of on-behalf payments for fringe benefits and salaries from the paying entity or the third-party recipient. An employer government should make the following disclosures in the notes to its financial statements and provide this information to Department of Administration (DOA) Statewide Accounting Bureau (SAB). • Amounts of expenditure or expense and revenue recognized due to on-

behalf payments for fringe benefits and salaries • If on-behalf payments to pension plans have been made for which the

employer government is not legally responsible, the name of the plan and the name of the paying government

2. Financial reporting by the paying governmental entity GASB 24 requires the governmental entity that makes on-behalf payments for fringe benefits and salaries to classify the payments in the same way as other similar cash grants made to other entities. For example, a state government makes on-behalf pension payments for public school teachers. The classification of those payments would depend on how the state government classifies similar educational cash grants made to public school districts. If the educational cash grants are classified as education expenditures, the on-


behalf payments should also be reported as education expenditures, not as pension expenditures.

VIII. Unearned Revenue, Unavailable Inflows of Resources, Deferred Inflows of Resources, and Deferred Outflows of Resources Revenue that is measurable and realizable but does not yet meet the other criteria for revenue recognition should be recorded as either unearned revenue or unavailable inflows of resources. In an exchange or exchange-like transaction, revenue that is received in advance of providing a good or service is reported as unearned revenue. In modified accrual funds, amounts that meet the applicable revenue recognition criteria, other than availability, are reported as unavailable inflows of resources until they are available to liquidate liabilities of the current period. In full accrual funds, amounts that are unavailable to liquidate liabilities of the current period should never be recorded as unavailable inflows of resources. Instead the amount should be recognized as revenue in the period in which it meets the applicable revenue recognition criteria regardless of availability. In government-mandated nonexchange transactions and voluntary nonexchange transactions, including certain grant programs, advance payments are made and the eligibility requirements, other than time requirements, have been met, the resources should be classified as a deferred outflow of resources by the provider and a deferred inflow of resources by the recipient until such time as the resources are first permitted to be used. With imposed nonexchange activities, when resources are received before (a) the period for which property taxes are levied or (b) the period when resources are required to be used or when use is first permitted for all other imposed nonexchange revenues in which enabling legislation includes time requirements, they should be recorded as deferred inflows of resources. The State of Montana uses the Entitywide ledger to convert governmental funds from the modified accrual basis to the full accrual basis of accounting. Thus, any amounts recorded as unavailable revenue in governmental funds because they were unavailable to liquidate liabilities of the current period should be reversed in the Entitywide ledger and recorded as revenue. When the amount becomes available, revenue should be recorded with the receipt of the cash in the Actuals ledger. Unavailable revenue should then be debited and the receivable should be credited in the Actuals ledger. The same revenue account should be debited in the Entitywide ledger and unavailable revenue should be credited. Below are some common transactions and how they relate in regard to the recording of unearned revenue, unavailable inflows of resources, deferred outflows of resources, and deferred inflows of resources.


Type of Transaction Modified Accrual Treatment

Full Accrual Treatment

Cash is received in advance of the good/service being provided.

Recorded as unearned revenue in the Actuals ledger. No Entitywide ledger entry is made.

No Entitywide ledger entry is made.

Customer is billed, a good/service is provided, but the cash will not be available to finance expenditures of the current fiscal year (or within 60 days of year-end).

Receivable and unavailable inflows of resources are established in the Actuals ledger.

The unavailable inflows of resources in the Entitywide ledger are reversed and revenue is established.

Customer is billed in advance of the good/service being provided.

No entry in either ledger is recorded until service is provided.

No entry in either ledger is recorded until service is provided.

Property tax revenue is received in a year before the year for which the property taxes were levied.

Deferred inflows of resources in the Actuals ledger. No Entitywide ledger entry is made.

No Entitywide ledger entry is made.

The net carrying value of old debt is less that the reacquisition price of old debt.

No entry is made in the Actuals ledger.

Entitywide ledger entry is made to deferred outflows of resources.

A. Accounting Entries – Revenue Not Available Assume a state special revenue fund is owed $1,000 by an entity outside of the State but will not receive the money until 95 days after June 30.

To record receivable and deferred revenue on modified accrual basis State special revenue fund – Actuals ledger

Debit 1203(A) Accounts receivable – external 1,000 Credit 2516(A) Unavailable inflows of resources 1,000

To reverse deferred revenue and set up revenue for full accrual basis State special revenue fund – Entitywide ledger

Debit 2516(A) Unavailable inflows of resources 1,000 Credit 526040 Misc. receipts - general 1,000

95 days after fiscal year-end, the money is collected by the agency.


To record receipt of cash State special revenue fund – Actuals ledger

Debit 1104 Cash in bank 1,000 Credit 526040 Misc. receipts - general 1,000

To reverse prior year accrual State special revenue fund – Actuals ledger

Debit 2516(A) Unavailable inflows of resources 1,000 Credit 1203(A) Accounts receivable – external 1,000

To reverse last year’s entitywide entry recording revenue and reversing unavailable inflows of resources State special revenue fund – Entitywide ledger

Debit 526040 Misc. receipts - general 1,000 Credit 2516(A) Unavailable inflows of resources 1,000

B. Accounting Entries – Cash Received Before Revenue Is Earned Assume a state special revenue fund is paid $1,000 for services that have not yet been provided to an entity outside of the State.

To record receipt of cash and Unearned inflows of resources State special revenue fund – Actuals ledger

Debit 1104 Cash in bank 1,000 Credit 2505(A) Unearned revenue 1,000

The service is then provided to the entity by the state special revenue fund.

To record revenue for services provided to entity State special revenue fund – Actuals ledger

Debit 2505(A) Unearned revenue 1,000 Credit 526040 Misc. receipts – general 1,000

C. Accounting Entries – Property Tax Received Before Period for Which It Is Levied Assume a state levied $450,000 of property taxes for calendar year 2019. Payment is received for $225,000 in November of 2018.

To record receipt of cash and deferred inflow of resources Actuals ledger

Debit 1104 Cash in bank 225,000 Credit 2536 Imposed NE deferred inflows 225,000


Entry to move the deferred inflows of resources to revenue account – January 2019 Actuals ledger

Debit 2536 Imposed NE deferred inflows 225,000 Credit 510330 Property taxes 225,000

D. Accounting Entries – Debt Refunding Assume the state has a bond with a carrying value of $15,000. The reacquisition price of the bond is $18,000. The remaining life of the old debt is three years and the life of the new debt is five years.

To record the payoff of the old debt.

Debit 1908 Refunding deferred outflows 3,000 Debit 2621 LT bonds payable – current 5,000 Debit 2601 LT bonds payable – noncurrent 10,000 Credit 1104 Cash in bank 18,000

Entry to record interest expense for the following three years.

Debit 69102 Bond interest 1,000 Credit 1908 Refunding deferred outflows 1,000

IX. Revenue Abatements Debits to revenues are appropriately used for the following purposes:

• Disbursements of overpayments received from outside parties previously recorded as revenues. This would include any rebates or refunds for overcharges. The payment must be directly identifiable with revenue made to the same outside party and debited to the same original revenue that was credited.

• Reimbursable payment of specific items incurred by an agency that are nonrecurring and non-routine in nature and are the responsibility of the outside party. If an agency is paying for the outside party on a regular basis as a convenience to the public or other outside person, the payment for these services should be recorded as expense.

• Writing off or transferring a receivable to the Department of Revenue or an outside collection agency in a modified accrual fund for a revenue-generated receivable. Also, it is allowable when establishing an allowance for doubtful accounts in a modified accrual fund for a revenue-generated receivable.

• Issuing an experience refund. Experience refunds are based on the experience of individual policyholders or pool participants. Revenue should


be reduced by amounts that are expected to be paid in the form of experience refunds.

• Reversing an accrual established during the prior year-end. This should be done in the month of October. When reversing a prior year accrual, the revenue debited should be the same account number as the revenue credited when the accrual was initially established. The revenue line should have the current year in the program year field in SABHRS. See Section X – Receivables, for more information on the accrual process.

• Correction of an error. If an error related to revenue was made in the current or previous fiscal year, revenue should be abated and either the prior or current program year should be used depending on when the error was made.

X. Receivables Receivables are defined as claims held against others for services provided, goods sold, or taxes levied. This includes amounts billed or items submitted for collections for which monies are to be collected. Agencies having valid receivables are required to record the receivables in SABHRS. However, discretion is to be used, depending on individual circumstances. The timing of recognition of receivables resulting from exchange transactions should occur as soon as the underlying transaction occurs if the resources are not yet received. The timing of receivable recognition for each type of non-exchange transactions is outlined below, regardless of whether it is in a modified or full accrual fund:

• Derived tax revenues - when the underlying exchange transaction occurs as long as the resources have not yet been received.

• Imposed non-exchange revenues - when the government has an enforceable legal claim to the resources as long as the resources have not yet been received. o For property taxes, a receivable should be recognized in the fiscal year

for which the property taxes are being levied, even if an enforceable legal claim to those taxes does not arise until the subsequent fiscal period.

• Government-mandated and voluntary non-exchange transactions - when all applicable eligibility requirements are met as long as the resources have not yet been received. Eligibility requirements include the following: o The recipient (and secondary recipients, if applicable) has the

characteristics specified by the provider. o Time requirements specified by enabling legislation or the provider

have been met. This is the period when the resources are required to be used (sold, disbursed, or consumed) or when use is first permitted has begun, or the resources are being maintained intact, as specified by the provider.




A. Accruals at Fiscal Year-End in Modified Accrual Funds

For those revenues determined to be susceptible to accrual, a receivable net of estimated uncollectibles should be recorded at fiscal year-end. In addition, for those revenues subject to refund, e.g., income tax withholding, the agencies should record an estimated liability and corresponding reduction in revenue for refunds that are associated with the revenue accrued and expected to be paid in the next fiscal year. The amount expected to be refunded should be determined after giving due consideration to current economic factors and the statistical experience for that revenue source. The estimated refunds may be calculated as a percentage of the recorded revenue based on the experience of prior years. In the next fiscal year, all cash receipts are recorded as current year revenue whether or not receipts are related to the revenue accruals established in the previous fiscal year-end period. In the month of October, when all revenue related to the previous year’s accruals is expected to have been received, the following entries must be made:

a. Prior year revenue adjustment - The portion of current year receipts collected in the first quarter of the fiscal year that correspond to the revenue accrued at the end of the previous fiscal year should be taken out of the revenue with the current program year and reported as a revenue with the prior program year.

b. Accrual reversal - The original accrual entry is reversed with a debit to revenue with the prior program year and a credit to the appropriate receivable account.

1. Accounting entries The following is an example of the transactions that would occur during the fiscal year-end process of the first year through October of the following year:

Fiscal year 2018 revenue accrual $100,000 Fiscal year 2019 actual receipts $200,000 of which $175,000 is FY18

revenue At fiscal year-end 2018:


To establish accrual at fiscal year-end State special revenue fund – Actuals ledger

Debit 1203(A) Accounts receivable - external 100,000 Credit 510330 Property taxes general (program year

2018) 100,000

Fiscal year 2019, July through September:

To record actual receipts received State special revenue fund – Actuals ledger

Debit 1104 Cash in bank 200,000 Credit 510330 Property taxes general (program year

2019) 200,000

Fiscal year 2019, October:

To adjust current year receipts for that portion that relates to the prior year State special revenue fund – Actuals ledger

Debit 510330 Property taxes general (program year 2019)

175,000

Credit 510330 Property taxes general (program year 2018)

175,000

To reverse FY18 accrual entry State special revenue fund – Actuals ledger

Debit 510330 Property taxes general (program year 2018)

100,000

Credit 1203(A) Accounts receivable - external 100,000

B. Revenue and Accrual Entries That Incorporate Changes in Tax Distribution Section 17-2-124, MCA, requires that the distribution of tax and fee revenue must be made according to the provisions of the law governing allocation of the tax or fee that were in effect for the period in which the tax or fee revenue was recorded for accounting purposes. Periodically, changes in the distribution of a particular tax occur at the beginning of the fiscal year. The tax receipts received in the first 60 days are recorded using the distribution in effect for the period in which the taxes were incurred. 1. Accounting entries The following facts are assumed in the example accounting entries that follow:

Fiscal year 2018 revenue accrual

$100,000


Fiscal year 2019 actual receipts

$200,000 of which $175,000 was fiscal year 18 revenue

Fiscal year 2018 distribution 45% General Fund, 55% State Special Revenue Fund

Fiscal year 2019 distribution 40% General Fund, 45% State Special Revenue Fund, 15% Debt Service Fund

At fiscal year-end 2018:

To establish FY18 accrual at fiscal year-end Actuals ledger Debit 1203(A) Accounts receivable – external (fund

01100) 45,000

Debit 1203(A) Accounts receivable – external (fund 02XXX)

55,000

Credit 510330 Property taxes general (program year 2018, fund 01100)

45,000

Credit 510330 Property taxes general (program year 2018, fund 02XXX)

55,000

Fiscal year 2019, July through September: To record actual receipts received – using the distribution percentages in effect for the period in which the taxes were incurred Actuals ledger Debit 1104 Cash in bank (fund 01100) 88,750 Debit 1104 Cash in bank (fund 02XXX) 107,500 Debit 1104 Cash in bank (fund 04XXX) 3,750 Credit 510330 Property taxes general (program year

2019, fund 01100) 88,750


107,500


3,750

Note: Fiscal year 2018 revenue $175,000 is distributed using FY18 distribution percentages: 175,000x45%=78,750 is distributed to fund 01100; and 175,000x55%=96,250 is distributed to fund 02XXX. Fiscal year 2019 revenue $25,000 is distributed using FY19 distribution percentages: 25,000x40%=10,000 is distributed to fund 01100; 25,000x45%=11,250 is distributed to fund 02XXX; and 25,000x15%=3,750 is distributed to fund 04XXX. Total FY18 and FY19 revenues collected are recorded as FY19 revenue in the month of collection.

Fiscal year 2019, October:


To adjust current year receipts for the portion that relates to the prior year – using the distribution percentages in effect for the period in which the taxes were incurred Actuals ledger Debit 510330 Property taxes general (program year

2019, fund 01100) 78,750

Debit 510330 Property taxes general (program year 2019, fund 02XXX)

96,250

Credit 510330 Property taxes general (program year 2018, fund 01100)

78,750


96,250

To reverse FY18 accrual entry Debit 510330 Property taxes general (program year

2018, fund 01100) 45,000

Debit 510330 Property taxes general (program year 2018, fund 02XXX)

55,000

Credit 1203(A) Accounts receivable - external (fund 01100)

45,000

Credit 1203(A) Accounts receivable - external (fund 02XXX)

55,000

XI. Allowance for Uncollectible Accounts An allowance for uncollectible accounts should be established so that the balance sheet and operating statement are fairly stated at the amount expected to be collected. The entry creates a contra asset account (credit balance), when netted against the gross total of receivables, that represents the true value of the receivables. In modified accrual funds, bad debt expense should be recorded only in conjunction with transactions in which there is no revenue associated with the receivable, for example loans receivable. For receivables that have associated revenue, such as taxes receivable, uncollectible amounts should be reflected as a reduction of revenue rather than bad debt expense. In full accrual funds, allowance for doubtful accounts should always offset with bad debt expense.

A. Accounting Entries Assume the following receivable is established in a state special revenue fund (modified accrual) and it is determined that 1% of the total receivable will be uncollectible:


To establish receivable State special revenue fund – Actuals ledger

Debit 1203(A) Accounts receivable - external 100,000 Credit 502301 Coal fees & permits 100,000

Since the receivable above is revenue-generated, the following entry should be recorded in the state special revenue fund:

To establish allowance for uncollectible accounts State special revenue fund – Actuals ledger

Debit 502301 Coal fees & permits 1,000 Credit 1212 Allowance for uncollectible accounts 1,000

Now assume another receivable is established in the same state special revenue fund (modified accrual), and it is determined that 2% of the total receivable will be uncollectible:

To establish loan receivable State special revenue fund – Actuals ledger

Debit 1207 Long-term notes & loans receivable 100,000 Credit 1104 Cash in bank 100,000

Since the receivable above is not revenue-generated, the following entry should be recorded in the state special revenue fund:

To establish allowance for uncollectible accounts State special revenue fund – Actuals ledger

Debit 62816 Bad debt write-off 2,000 Credit 1217 Allowance- long-term uncollectible

accounts 2,000

Now assume a receivable is established in an enterprise fund (full accrual) with 3% of the total receivable determined to be uncollectible:

To establish receivable Enterprise fund – Actuals ledger

Debit 1203(A) Accounts receivable – external 100,000 Credit 560301 Rental income 100,000

The following entry is recorded in the enterprise fund, regardless of whether the receivable is revenue-generated or not:


To establish allowance for uncollectible accounts Enterprise fund – Actuals ledger

Debit 62816 Bad debt write-off 3,000 Credit 1212 Allowance for uncollectible accounts 3,000

XII. Collection of Receivables Agencies should have policies in place to ensure timely billing of receivables to help lower the number of uncollectible receivables recorded in the accounting system. Receivable and allowance balances should be periodically reviewed and adjusted. When an agency has made all reasonable attempts and cannot collect a valid accounts receivable, it must transfer the account to Department of Revenue or an outside collection agency. If the agency, the Department of Revenue, or the outside collection agency deems the account to be uncollectible, it should be written off. Receivables and their related allowance should not permanently sit idle in the accounting system.

A. Bad Debt Transfer to Department of Revenue A current year non-budgeted expenditure is recorded when transferring an account receivable to the Department of Revenue, with one exception. The exception is for funds on the modified accrual basis where the receivable being transferred was a result of recording revenue. In this situation, revenue is abated rather than recording an expenditure. If an allowance for uncollectible accounts was previously established, that allowance should be reversed when the accounts receivable is transferred to the Department of Revenue. If an agency has written off a receivable and transferred it to the Department of Revenue, the receivable should not appear anywhere, or in any form, on the transferring agency’s SABHRS records. A custodial fund (or another type of fund) should not be used to track amounts transferred to the Department of Revenue. If an agency needs to maintain a record of receivables transferred, it will have to do so outside of SABHRS. 1. Accounting entries

The entries to record the bad debt transfer are to be made as follows: • By the agency transferring the uncollectible receivable to the Department

of Revenue: o If the fund uses the modified accrual basis of accounting and revenue

has been previously recognized: To transfer uncollectible receivable to the Department of Revenue Actuals ledger

Debit 5XXXXX and/or 121X

Revenue account used or allowance for uncollectible accounts (if allowance has been previously established)

1,000

Credit 12XX Applicable receivable account 1,000


Note: If the receivable being transferred was recognized as revenue in a prior year, a prior program year must be used in the program year field in SABHRS.

o If the fund uses the full accrual basis of accounting or in a modified accrual fund, if a revenue has not been previously recognized, all other receivables are written off as:

To transfer uncollectible receivable to the Department of Revenue Actuals ledger

Debit 62816 and/or 121X

Bad debt write off or allowance for uncollectible accounts (if allowance has been previously established)

1,000

Credit 12XX Applicable receivable account 1,000 • By the Department of Revenue to record transfer from agency of the

uncollectible receivable: Department of Revenue records uncollectible receivable in a custodial fund Actuals ledger

Debit 1203(A) Accounts receivable – external 1,000 Credit 1216 Allowance for bad debts transferred 1,000

• If the Department of Revenue collects the receivable, they will record the following entries:

Department of Revenue records collection of receivables Actuals ledger

Debit 1104 Cash in bank 1,000 Credit 2506(A) Uncleared collections 1,000

Department of Revenue reverses accounts receivable and allowance Actuals ledger

Debit 1216 Allowance for bad debt transferred 1,000 Credit 1203(A) Accounts receivable – external 1,000

• When the cash from collection of the receivable is returned to the transferring agency, the entries would be: o Inter-unit journal – the Department of Revenue side:

Department of Revenue records disbursement of cash to agency net of collection charges Actuals ledger

Debit 2506(A) Uncleared collections 900 Credit 1104 Cash in bank 900

o Inter-unit journal – the agency receiving the cash side:


To reverse receivable write-off in a modified accrual fund where revenue was recorded when the receivable was originally established. Also, to record expenditure/expense for any fees charged by Department of Revenue:

To record receipt of cash from recovered accounts receivable Actuals ledger

Debit 1104 Cash in bank 900 Debit 628A4 Bad debt collection fee – DOR 100 Credit 5XXXXX Revenue originally recorded* 1,000

*If the uncollectible receivable was originally recognized as revenue in a prior year, the subsequent reinstatement of the revenue should use a prior program year.

To reverse receivable write-off for full accrual funds or non- revenue-generated modified accrual receivables and record expenditure/expense for any fees charged by Department of Revenue:


Debit 1104 Cash in bank 900 Debit 628A4 Bad debt collection fee – DOR 100 Credit 62816 Bad debt write off* 1,000

*If the uncollectible receivable was originally written off and charged to bad debt expense in a prior year, the subsequent abatement of the bad debt expense should be recorded using a prior program year.

• The Department of Revenue records the fee revenue in their internal service fund:

To record revenue for fee charged for collection services Actuals ledger

Debit 2506(A) Un-cleared collections (custodial fund) 100 Credit 1104 Cash in bank (custodial fund) 100 Debit 1104 Cash in bank (internal service fund) 100 Credit 520231 Debt collections (internal service fund) 100

• If Department of Revenue deems a receivable to be uncollectible, they would record the following entry:

To reverse the receivable Actuals ledger

Debit 1216 Allowance for bad debts transferred 1,000


Credit 1203(A) Accounts receivable – external 1,000 • There would be no entry to record for the transferring agency.

B. Bad Debt Transfer to Collection Agencies Outside of the State A current year non-budgeted expenditure is recorded when using a collection agency to collect bad debt, with one exception. The exception is for funds on the modified accrual basis where the receivable being transferred was a result of recording revenue. In this situation, revenue is abated rather than recording expenditure. The expenditure or revenue should be recorded net of any allowance that has already been established. 1. Accounting entries Facts assumed in the example journal entries: Original receivable - $1,000; allowance for uncollectible accounts at the time the receivable was transferred to the collection agency - $100; total allowance deemed necessary at the time the receivable was transferred to the collection agency - $500; gross amount collected by the collection agency - $300; fee retained by the collection agency - $60.

• When the receivable is transferred to the collection agency o If an adequate allowance for uncollectible accounts has already been

recorded, no accounting entry is required when the receivable is transferred to the collection agency

o If the allowance for uncollectible accounts needs to be adjusted If the fund uses the modified accrual basis of accounting and revenue

has been previously recognized: To transfer amount over to the collection agency, net of allowance that has been previously established Actuals ledger

Debit 5XXXXX Revenue account used for allowance for uncollectible accounts (net of allowance that has been previously established)*

400

Credit 121X Allowance for uncollectible accounts 400

*If the receivable being transferred was recognized as revenue in a prior year, a prior program year must be used in the program year field in SABHRS.

If the fund uses the full accrual basis of accounting or, or in a modified accrual fund, if a revenue has not been previously recognized, all other receivables are written off as:


To increase allowance for uncollectible accounts Actuals ledger

Debit 62816 Bad debt write off or allowance for uncollectible accounts (net of allowance that has been previously established)

400

Credit 121X Allowance for uncollectible accounts 400 • When the cash from collection of the receivable are returned to the

transferring agency, the entries would be: o To record collection by a modified accrual fund where revenue was

recorded when the receivable was originally established. Also, to record expenditure/expense for any fees charged by collection agency:

To record receipt of cash from recovered accounts receivable in a modified accrual fund Actuals ledger

Debit 1104 Cash in bank 240 Debit 628A5 Bad debt collection fee - external 60 Credit 5XXXXX Revenue originally recorded* 300

*If the uncollectible receivable was originally recognized as revenue in a prior year, the subsequent reinstatement of the revenue must use a prior program year.

o To record collection by a full accrual fund or non-revenue-generated modified accrual receivables and record expenditure/expense for any fees charged by the collection agency:


Debit 1104 Cash in bank 240 Debit 628A5 Bad debt collection fee – external 60 Credit 62816 Bad debt write off* 300


• To write off the receivable once if it is determined that no amounts will be collected: o If the receivable is fully allowed for, and assuming the receivable and

allowance have $1,000 balance: To write-off the receivable Actuals ledger

Debit 121X Allowance for uncollectible accounts 1,000


Credit 12XX Applicable receivable account 1,000 o If the receivable is partially allowed for: To write-off receivable in a modified accrual where revenue was

recorded when the receivable was originally established: To write-off the receivable Actuals ledger

Debit 5XXXXX Revenue originally recorded* 500 Debit 121X Allowance for uncollectible account 500 Credit 12XX Applicable receivable account 1,000

*If the uncollectible receivable was originally recognized as revenue in a prior year, the subsequent reinstatement of the revenue must use a prior program year.

To write-off receivable in a full accrual fund or non-revenue-generated modified accrual receivables:

To write-off the receivable Actuals ledger

Debit 62816 Bad debt write off* 500 Debit 121X Allowance for uncollectible account 500 Credit 12XX Applicable receivable account 1,000


C. Third-Party Revenue Collection Agencies may allow third parties to collect revenues on their behalf. Examples of these third parties include, but are not limited to, licensing agents, other governmental entities, credit card processing companies, and web transaction processors. The accounting treatment for this activity depends on whether a collection cost exists for the State. For example, a license that can be purchased directly from a state agency for $100 is available to the public on the web at a cost $105, with the additional $5 retained by a third-party agent. This $5 fee is revenue for the third-party agent and does not have any economic or accounting impact on the state agency. It is a fee paid directly to the third-party agent, by the purchaser, for using the web. A collection cost exists for the state agency if the agency receives less revenue for the transactions processed by the agent than it would have if the agency were paid directly. This has an impact on the amount of money ultimately received. For example, a license that can be purchased directly from a state agency for $100 is available on the web at a cost of $100 with a $5 fee (regardless of whether it is called a convenience or processing fee) retained by a third-party agent. This $5 fee is revenue for the third-party agent and a collection expense/expenditure, which must be reported on the state accounting system.


To properly report this activity, an agency must report the full amount of revenue at $100 with an associated collection expense/expenditure of $5. 1. Accounting entry The entry to record the full revenue and related collection costs: The agency receives the $95 license fee from a web transaction processor, net of the $5 collection fee

To record revenue collected by a third party net of fee retained Actuals ledger

Debit 1104 Cash in bank 95 Debit 6XXXX Appropriate collection

expense/expenditure account 5

Credit 5XXXXX Revenue account used for the related license fee

100

For more information related to reconciliation of agent-collected revenues, deposit and reconciliation of third-party revenue collections, or how to request a modified deposit schedule, refer to MOM Policy 325 – Cash Accounts and Deposits.

XIII. Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues

This section outlines state accounting policies for sales and pledges of receivables, sales and pledges of future receivables, and intra-entity transfer of assets and future revenues. GASB Statement No. 48 – Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues (GASB 48), has been issued to answer questions about how to account for these types of transactions. Although such transactions (for example, those related to delinquent property tax receivables or future tobacco settlement receipts) have become more prevalent, no single standard previously existed on how to account for them and report them to the public. GASB 48 makes a basic distinction between sales of receivables and future revenues, on the one hand, and the pledging of receivables or future revenues to repay a borrowing (a collateralized borrowing), on the other. The answer to the question of whether a transaction is a sale or a collateralized borrowing is important because the cash received from a sale may be recorded as revenue in some cases, but the cash from a borrowing is not; instead, the borrowing results in a liability on the government’s financial statements. A transaction should be reported as a collateralized borrowing or a sale based on its economic substance rather than on the label attached to it. This statement does not apply to a government’s pledge of its “full faith and credit” as security for its own debt or the debt of a component unit. A. Determining Whether a Transaction Is a Sale or a Collateralized Borrowing


The most significant factor distinguishing sales from borrowing is the continuing involvement of the business unit or the state agency doing the selling or borrowing. GASB 48 states that a transaction is a collateralized borrowing unless it meets criteria that demonstrates that the state agency is no longer actively involved with the receivables or future revenues it has transferred to the other party. The standards set forth the criteria for determining whether the state agency continues to be involved. These criteria are stated below. The requirement of this statement applies to all state agencies. State and local governments who wish to pledge receivables as collateral for a loan should ensure that they are in compliance with the Montana Constitution, Article VIII, Section 8.

B. Assessing a Government Continuing Involvement 1. Receivables

A transaction in which the state agency is entitled to proceeds in exchange for the future cash flows from receivables should be reported as a sale if the agency’s continuing involvement with those receivables is effectively terminated. The continued involvement is terminated if all the following criteria are met: • The transferee’s ability to subsequently sell or pledge the receivables is

not significantly limited by constraints imposed by the transferor agency, either in the transfer agreement or through other means, for example, organizational or structural restrictions.

• The transferor does not have the option or ability to unilaterally substitute for or reacquire specific accounts from among the receivables transferred. However, the ability or obligation to substitute for defective accounts, at the option of the transferee, would not violate this criterion. For example, accounts that do not possess the characteristics stipulated in a transfer agreement may be replaced with ones that do possess those traits. In addition, insignificant “clean-up” calls (by which the transferor may reacquire the remaining uncollected accounts when the outstanding secured debt reaches a specified minimum balance) would likewise not violate this criterion.

• Neither the seller nor the buyer can cancel the sale, including cancellation through payment of a lump sum or transfer of other assets or rights.

• The seller cannot limit in any significant way the buyer’s ability to subsequently sell or pledge the receivables or future revenues.

• The seller no longer has access to the receivables, future revenues, or the cash collected from them, in other words isolated.

2. Criteria to determine if receivables have been isolated The criteria are as follows: • The transferee should have legal standing separate from the transferor.

Legal separation should be assessed in a manner consistent with the


approach for determining whether an organization is a legally separate entity.

• Generally, banking arrangements should eliminate access by the transferor and its component units (other than the transferee) to the cash generated by collecting the receivables. Access is eliminated when payments on individual accounts are made directly to a custodial account maintained for the benefit of the transferee. However, if the transferor continues to service the accounts, or if obligors misdirect their payments on transferred accounts to the transferor: o The payments to the transferee should be made only from the

resources generated by the specific receivables rather than from the transferor’s own resources. The transferor should have no obligation to advance amounts to the transferee before it collects equivalent amounts from the underlying accounts.

o Cash collected by the transferor on behalf of the transferee should be remitted to the transferee without significant delay. In addition, earnings on invested collections should be passed on to the transferee.

o The transferor should consider proceeds received from the transferee as satisfaction of individual accounts. The transferor should indicate in its records which accounts have been transferred and which collections pertain to those accounts. For example, in a transaction involving delinquent taxes, the proceeds from the transferee should be accepted by the taxing agency as satisfaction of the delinquent taxes owed by the individual property owners. Accordingly, the tax records should indicate that those taxes have been paid (or sold, or otherwise settled) and are no longer delinquent.

o Provisions in the transfer agreement (or provided elsewhere in statutes, charters, or other governing documents or agreements) should protect the transferee from the claims of the transferor’s creditors.

3. Future revenues A transaction in which a state agency receives proceeds in exchange for cash flows from specific future revenues should be reported as a sale if the agency’s continuing involvement with those revenues meets all of the following criteria: • The transferor state agency will not maintain an active involvement in the

future generation of those revenues. Active involvement should be determined based on the provisions in Section XIII.B.4 – Activities that constitute active involvement.

• The transferee’s ability (or the ability of the ultimate holder/owner of the future cash flows) to subsequently sell or pledge the future cash flows is not significantly limited by constraints imposed by the transferor, either in the transfer agreement, or through other means.


• The cash resulting from collection of the future revenues has been isolated from the transferor state agency. Generally, banking arrangements should eliminate access by the transferor and its component units (other than the transferee) to the cash generated by collecting the future revenues. Access is eliminated when the revenues are received directly by the transferee or are deposited directly into a custodial account maintained for the benefit of the transferee.

• The contract, agreement, or other arrangement between the original resource provider (a grantor organization, for example) and the transferor state agency does not prohibit the transfer or assignment of those resources.

• The sale agreement is not cancelable by either party, including cancellation through payment of a lump sum or transfer of other assets or rights.

4. Activities that constitute active involvement The state agency may cease active involvement in the generation of specific future revenues, yet remain involved with those revenues in some manner. Active involvement generally requires a substantive action or performance by the state agency. The state agency should determine whether the primary or fundamental activity or process that generates a specific revenue requires continuing active involvement. That is, when considering whether it maintains an active involvement in the generation of specific future revenues, a state agency should distinguish those activities that generate a specific revenue from those that, although associated with that revenue, are tangential, or incidental, or are undertaken to protect the revenue. Manifestation of a state agency’s active involvement in the future generation of revenues includes the following: • The state agency produces or provides goods or services that are

exchanged for the revenues. • The state agency levies or assesses taxes, fees, or charges and can

directly influence the revenue base or the rate(s) applied to that base to generate the revenues. For example, the revenue bases for property, sales, and income taxes are taxable real estate parcels, taxable retail sales, or taxable income, respectively. The taxing agency can directly influence any of those bases by establishing minimum taxable levels, granting exemptions, providing credits, or excluding certain transactions. The taxing agency may initiate, activate, or determine tax rates pertaining to each revenue base.

• The state agency is required to submit applications for grants or contributions from other governments, organizations, or individuals to obtain the revenues.

• The state agency is required to meet grant or contribution performance provisions to qualify for those revenues.

5. Activities that do not constitute active involvement


An agency may remain associated with specific revenues in ways that do not constitute the primary or fundamental activity that generates the revenues, and thus would not be considered to be actively involved in the generation of those revenues. Activities that would not be considered manifestations of active involvement in the generation of specific revenues include the following: • Holding title to revenue-producing assets (for leases, rents, or royalty

income, for example) • Owning the contractual right to a stream of future revenues (rights to

tobacco settlement revenues, for example) • Satisfying the “required characteristics” eligibility criterion in paragraph 20

of GASB Statement No.33 – Accounting and Financial Reporting for Non-exchange Transactions (GASB 33)

• Agreeing to refrain from specified acts or transactions (for example, agreeing to noncompetition restrictions)

C. Accounting for Collateralized Borrowings and Sale of Receivables 1. Collateralized borrowings

As noted earlier, if a transaction does not meet the criteria to be a sale, the transaction should be reported as a collateralized borrowing. The receivables or future revenues should be considered for financial statement purposes as pledged rather than sold. Proceeds received by the pledging agency should be reported as a liability in its statements of net position and as an other financing sources in its governmental funds statement of revenues, expenditures, and changes in fund balance, if governmental funds receive the proceeds. Similarly, a transferee agency should recognize a receivable for the amounts paid to the pledging agency. The pledging agency should continue to report pledged receivables as assets in the pledging agency’s balance sheet or statements of net position. Pledged revenues should continue to be reported as revenue by the pledging agency in accordance with recognition and measurement criteria appropriate to the specific type of revenue pledged. Collections of the pledged revenues or receivables that are subsequently paid to the transferee reduce the liability in the pledging agency’s statement of net position. Those payments also should be reported as expenditures, rather than reductions of revenue, in the pledging agency’s governmental funds statement of revenues, expenditures, and changes in fund balance, if governmental funds are used to report the transactions. Payments received from the pledging agency reduce the transferee’s receivables. Pledged receivables collected and paid to the transferee after the liability has been liquidated should be reported as expenditures/expenses (by the pledging agency) and revenues (by the agency transferee) when the pledging agency becomes obligated to make the payments.

2. Accounting entries- collateralized borrowing


Assume that a state agency pledges receivables or future revenues for a $5,000 loan. The transferor agency will make the following journal entries.

To record the receipt of cash and pledged revenues in the governmental funds State special revenue Actuals ledger

Debit 1104 Cash in bank 5,000 Credit 5XXXXX Pledged Revenues 5,000 To record the borrowings in the Entitywide ledger Debit 5XXXXX Pledged Revenues 5,000 Credit 21XX Pledged Rec. Payable 5,000

To Record the receipt of cash and pledged revenues in the proprietary funds Actuals ledger

Debit 1104 Cash in bank 5,000 Credit 21XX Pledged Rec. Payable 5,000

Assuming the transferor agency collected $2,000 on the pledged receivables, or the future revenue. The transferor agency will make the following entries.

To record collections on the pledged receivables in both governmental and proprietary funds Actuals ledger

Debit 1104 Cash in bank 2,000 Credit 1203 Accounts receivable net 2,000

The transferor agency would remit the $2,000 collections to the transferee as payment of the borrowings. The journal entries to record the $2,000 remittance would be as follows:

To record collections remitted to the transferee in the governmental funds Actuals ledger

Debit 6XXXX Pledged Rec. Paid/remitted 2,000 Credit 1104 Cash in bank 2,000

To reduce the liability with payment to the transferee in the Entitywide ledger Debit 21XX Pledged Rec. Payable 2,000 Credit 6XXXX Pledged Rec. Paid/Remitted 2,000


To record collection remitted to the transferee in the proprietary funds Actuals ledger

Debit 21XX Pledged Rec. Payable 2,000 Credit 1104 Cash in Bank 2,000

The transferee agency will make the following entries.

To record the amount paid for the receivables Actuals ledger

Debit 1203 Accounts Receivable net 5,000 Credit 1104 Cash in bank 5,000

3. Sale of receivables Receivables that are sold should be removed from the assets in the selling agency’s financial statements at their carrying values. Except for reporting in governmental funds, the difference between the proceeds (exclusive of amounts that may be refundable) and the carrying value of the receivables sold should be recognized as a gain or loss in the accrual-based financial statements in period of the sale. In governmental funds, the difference between the proceeds received and the receivables sold (net of allowances and unavailable inflows of resources) should be recognized as revenue in the modified accrual-based governmental funds financial statements. If the buyer of a receivable is an agency that is not a part of the selling agency’s financial reporting entity, it adds a receivable to its financial statements equal to the purchase price and recognizes an equivalent expense. Recognition by transferee within the same financial reporting entity as the transferor is addressed below in Section XIII.D – Intra-Entity Transactions. For the sale of future revenues, the selling agency should report the proceeds as deferred inflows of resources or revenue, in both the government-wide and fund financial statements. Generally, revenue should be reported as deferred inflows of resources and recognized over the duration of the sale agreement; however, there may be instances wherein recognition in the period of the sale is appropriate. For transactions with parties outside the financial reporting entity, deferral is required if the future revenue sold was not recognized previously because the event that would have resulted in revenue recognition had not yet occurred (for example, tobacco settlement revenues). Revenue should be recognized at the time of sale only if the revenue was not recognized previously because of uncertainty of realization or the inability to reliably measure the revenue. If the transferee is an agency outside of the transferor agency financial reporting entity, the transferee agency should recognize the acquisition at cost and amortize the balance over the life of the transfer agreement. The transferee agency, as owner of the future revenues, should recognize receivables and revenue when the recognition criteria appropriate to the specific type of revenue acquired are met. Recognition by


transferor and transferee within the same financial reporting entity as the transferor is addressed below in Section XIII.D – Intra-Entity Transactions.

4. Accounting entries- sale of receivables Assume that a state agency sold account receivables to a third party for $10,000. The carrying value of the receivables was $8,000, and the gain on sale was $2,000. Also, assume that the buyer was an agency outside the seller’s financial reporting entity. The following entries would be made to record the sale. The following entries would be made by the agency selling the receivables.

To record the sale of receivables at a gain in the governmental funds State special revenue Actuals ledger

Debit 1104 Cash in bank 10,000 Credit 1203 Account receivables net 8,000 Credit 5XXXXX Revenue 2,000 To record the sale in the Entitywide ledger Entitywide ledger

Debit 5XXXXX Revenue 2,000 Credit 5XXXXX Gain/loss on sale of AR 2,000

To record the sale in the proprietary funds Actuals ledger

Debit 1104 Cash in bank 10,000 Credit 1203 Accounts receivable, net 8,000 Credit 5XXXXX Gain/loss on sale of AR 2,000

The agency purchasing the receivables would make the following entries, assuming the receivables were purchased for $10,000.

To record the purchase of receivables Actuals ledger

Debit 1203 Accounts receivables.net 10,000 Credit 1104 Cash in bank 10,000

Assuming the transferee collected $2,000 on the receivables, the journal entries would be as follows.

Actuals ledger

Debit 1104 Cash in bank 2,000 Credit 1203 Accounts receivable net 2,000


Assuming a payment of $1,000 was received by the transferee in excess of the account receivable. The transferee would make the following entries.

Actuals ledger

Debit 1104 Cash in bank 1,000 Credit 5XXXXX Revenue 1,000

5. Accounting entries -sale of future revenues Assume that a state agency sold future revenues to a third party for $5,000. Also, assume that the buyer was an agency outside the seller’s financial reporting entity. The following entries would be made to record the sale.

To record the sale of future revenues by transferor agency Actuals ledger-

Debit 1104 Cash in bank 5,000 Credit 2538 Other deferred inflows 5,000

To record earned revenue by transferor agency Actuals ledger

Debit 2538 Other deferred inflows 5,000 Credit 5XXXXX Revenue 5,000

To record the purchase of future revenue by transferee agency Actuals ledger- State special revenue fund

Debit 1203 Accounts receivable net 5,000 Credit 1104 Cash in bank 5,000

D. Intra-Entity Transactions If the purchasing agency is a part of the same financial reporting entity as the selling agency, then the sale is an intra-entity transaction, and the transferee should recognize the assets or future revenues received at the carrying value of the transferor. For example, a state government might sell receivables to one of its component units, such as a public authority. In this case, the public authority purchasing the receivables should recognize assets equal to the carrying value of the transferor. The difference between the purchase price and the carrying value would be accounted for as a revenue, expense, or expenditure by the public authority in its separately issued financial statements. However, in the financial statements of the state’s reporting entity (of which both the state and the authority are a part), these amounts would be reported as transfers or subsidies between the two entities to avoid double-counting. In the case of a sale of future revenues between parts of the same reporting entity, the transferor agency has reported no carrying value for the rights sold


because the asset recognition criteria have not been met. Therefore, the transferee agency should not recognize an asset and related revenue until recognition criteria appropriate to that type of revenue are met. Instead, the transferee agency should report the amount paid as a deferred outflow of resources to be recognized over the duration of the transfer agreement. The selling agency should report the amount paid from the sale as a deferred inflow of resources in its government-wide and fund financial statements and recognize it over the duration of the sale agreement. The requirement of this statement applies to intra-entity donations of assets, which previously were required to be reported at fair value as determined at the date of the donation. GASB 48 requires the intra-entity transfer of assets should be recorded at the carrying value of the transferor. The activity with discretely presented component units should be regarded as internal from the perspective of the financial reporting entity, but the transactions should be labeled as revenues and expenses rather than transfers.

E. Recognition of Deferred Outflows and Deferred Inflows of Resources Deferred outflows of resources and deferred inflows of resources arising from the sale of future revenues should be recognized over the life of the sale agreement using a systematic and rational method. For example, periodic recognition could be determined by applying to the revenues recognized during the period by the transferee, the ratio of the resources received from the sale by the transferor to the estimated total future revenues sold by the transferee.

F. Recognizing Other Assets or Liabilities Arising From a Sale of Specific Receivables or Specific Future Revenues 1. Residual interests

A transferor agency may acquire a subordinate or junior note or a residual certificate representing the right to collections that exceed a stipulated level, generally, the annual or total debt service requirements of the transferee. A transferor agency should recognize a note or residual certificate as an asset, representing a residual interest in: • Excess receivable collections, giving consideration to the likelihood of

realization. Residual interests recognized in the period in which the sale occurred should be treated as an adjustment of the gain or loss (or revenues in governmental funds). Residual interests recognized in subsequent periods should be reported as revenues.

• Excess future revenues, when the asset recognition criteria appropriate to the specific type of revenue that underlies the note or certificate have been met. Revenue recognition of the residual interest also would occur at that time.

A transferee agency should recognize a liability for its obligation to remit residuals to the transferor agency, based on the recognition criteria in Section XIII.F.2 – Recourse and other obligations.

2. Recourse and other obligations


A transferor agency should recognize estimated liabilities arising from the purchase and sale agreement, for example, recourse obligations or repurchase commitments, when information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the obligation can reasonably be estimated.

3. Pledges of future revenues when resources are not received by the pledging government Some agencies pledge the future cash flows of specific revenues but do not receive resources in exchange for that pledge. For example, due to charter, statutory, or constitutional requirements, some agencies may be prohibited from issuing debt or limited in the extent to which they may issue debt. Those agencies, nevertheless, may be empowered to create separate component units to issue debt on their behalf that will benefit their constituencies, programs, or functions. As security for the debt issued by a component unit, the agency pledges all or a portion of a specific future revenue stream to the debt-issuing component unit without establishing itself as primarily or secondarily obligated for the component unit’s debt. The debt-issuing component unit then pledges those future payments from the pledging agency as security for its debt. The pledging agency should not recognize a liability, and the debt-issuing component unit should not recognize a receivable for the future revenue pledged. The pledging agency should continue to recognize revenue from the pledged amounts and should recognize a liability to the debt-issuing component unit and an expenditure/expense simultaneously with the recognition of the revenues that are pledged. The debt-issuing component unit should recognize revenue when the pledging agency is obligated to make the payments.

G. Required Disclosures 1. Collateralized borrowing

Governments are generally required by GASB 48 to present disclosures in the notes to the financial statements about the revenues they pledged to collateralize debt until the debt is fully repaid, including: • Identification of the pledged revenue source, the amount pledged, and the

percentage of the total revenue stream that has been pledged (if it can be estimated)

• Identification of the specific revenue pledged and the approximate amount of the pledge. Generally, the approximate amount of the pledge would be equal to the remaining principal and interest requirements of the secured debt.

• Identification of, and general purpose for, the debt secured by the pledged revenue

• The term of the commitment, that is the period during which the revenue will not be available for other purposes


• The relationship of the pledged amount to the total for that specific revenue, if estimable, that is, the proportion of the specific revenue stream that has been pledged

• A comparison of the pledged revenues recognized during the year with the required debt service payments for the year. For this disclosure, pledged revenues recognized during the period may be presented net of specified operating expenses, based on the provisions of the pledge agreement. However, the amounts should not be netted in the financial statements.

2. Sale of future revenues The following information should be disclosed about sales of future revenue streams: • Identification of the specific revenue sold and the approximate amount • The period of the sale • The percentage of the total revenue stream that has been sold • A comparison of the proceeds of the sale with the present value of future

revenues • Significant assumptions made to approximate the amount of revenue sold

and the calculation of its present value

XIV. Treasury Offset Program (TOP) – State Agencies as Debtors The federal government may offset the debt of one State agency with the expected payment of another State agency. This is due to the taxpayer identification number (TIN) being used by the federal government to identify the entities responsible for a federal debt. Any payment to an entity using the same TIN as the debtor is eligible for offset to collect the debt. All agencies use the same State of Montana TIN. At the time a payment is offset, TOP sends a notice to the payee. This notice is sent to the last known address on file. At the time the notice is received, the receiving agency may need to work with TOP and SAB to determine which agency is the true debtor. Until the debtor is determined, the agency short paid can work with SAB to be reimbursed, via IU journal from DOA. Once the debtor is determined, it is the responsibility of the agency that owes the debt to work with the federal government to get the issue resolved. The debtor agency is responsible for paying back DOA, even if they are in dispute with the federal government regarding the debt. Once it has been determined who the debtor agency is, they have seven business days to issue payment back to DOA, via IU journal (see below for entry example). Information regarding the offset can be found by contacting the TOP Call Center at 1(800) 304-3107. See the link below for additional information and frequently asked questions regarding the Tax Offset Program. https://fiscal.treasury.gov/top/ Prior to the debtor agency being determined, an entry will need to be made by DOA to reimburse the agency shorted by the offset:

https://fiscal.treasury.gov/top/


Accounting Entries (IU journal from DOA to payee): DOA

Debit 2563 TOP Clearing

Credit 1104 Cash

Agency expecting payment

Debit 1104 Cash

Credit 59**** Federal/Grant Revenue

Once the debtor agency is determined, an entry will need to be made by the debtor to reimburse DOA for the offset: Accounting Entries (IU journal from debtor to DOA): Owing agency

Debit 1302 Due From Federal Government

Credit 1104 Cash DOA

Debit 1104 Cash

Credit 2563 TOP Clearing Once the debtor agency works with the federal government and gets the issue resolved, an entry will need to be made to clear the “due from” balance: Accounting Entries (ONL journal): Received offset money back from federal government:

Debit 1104 Cash

Credit 1302 Due From Federal Government Or, Determined that agency truly owes federal government and is not reimbursed:

Debit 59**** Federal/Grant Revenue

Credit 1302 Due From Federal Government

Accounting Montana Operations Manual Policysfsd.Mt.gov/Portals/24/320 Revenues Receivables Debt...

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