Question

• Distinguish between an exchange and a nonexchange transaction. Analyze the reporting requirements for nonexchange transactions under GASB Statement No. 33 Accounting and Financial Reporting for Nonexchange Transactions focusing on the required criteria for reporting revenue on the modified accrual basis.
• Describe circumstances under which a government entity must report a pass-through grant as both revenue and expenditure. Examine the importance of accurately reporting pass-through grants on government entities.

Answer 1

Differnce between exchange and non exchange transaction

An exchange or exchange-like transaction is one in which each party receives and sacrifices something of approximate equal value. A non-exchange transaction is one in which one party receives something of value without directly giving value in exchange. Grants can be either exchange or non-exchange transactions. GASB 33 only applies to non-exchange transactions.

GASB 33 applies to all non-exchange transactions, regardless of fund.

GASB 33 only applies to financial or capital resources; it does not apply to other resources, such as contributed services.

2.Reporting requirement of GASB 33

Non-exchange transactions may include, but are not limited to:

• Fines & penalties: Asset and revenue recognized when enforceable legal claim arises or resources received, whichever is first. Appears that our current method of recognizing asset (receivable) and revenue when fines are assessed will not change. The ticket/fine is an enforceable legal claim.
• Gifts/donations: Assets recognized when all eligibility requirements are met or funds are received; whichever is first. Revenue recognized when all eligibility requirements have been met. If gift is received prior to meeting eligibility requirements, it is recorded as deferred revenue. Eligibility requirements are conditions specified by a donor that must be met, such as time requirements, matching requirements. Purpose restrictions are not eligibility requirements and do NOT affect revenue recognition. Gifts received with purpose restrictions will be reported as restricted until used for designated purpose or until restriction expires.
  
  Some gifts are received with the stipulation that the resources cannot be sold, disbursed, or consumed until a specified number of years have passed or a specific event has occurred, such as endowments, term endowments, works of art and historical treasures. For these gifts, revenues are recognized when the resources are received, provided that all eligibility requirements are met. Resulting net assets/fund balance should be reported as restricted for as long as the restrictions or time requirements remain in effect.
• Certain grants, entitlements: Assets recognized when all eligibility requirements are met or funds are received; whichever is first. Revenue recognized when all eligibility requirements have been met. If grant funds are received prior to meeting eligibility requirements, they are recorded as deferred revenue. Eligibility requirements are conditions specified by the grantor that must be met, such as an eligible recipient, time requirements, matching requirements, etc. If a reimbursement-type grant, institution must have incurred allowable costs prior to revenue recognition. Routine requirements such a filing a claim or a progress report do not delay recognition. Purpose restrictions are not eligibility requirements and do NOT affect revenue recognition. Grants received with purpose restrictions will be reported as restricted.
• Promises to give (pledges): Must be promised by a non-governmental entity – individual, business, or organization. Asset (receivable) and revenue is recognized when all eligibility requirements are met and amount is verifiable, measurable, and collection is probable (likely to occur). It should be noted that endowment pledges are generally not recognized until received since the promise to not sell, disburse, or consume the asset cannot be honored until the asset has been received.

Circumstances under which entity must report pass through grants

3.This Statement establishes accounting and financial reporting standards for pass-through grants, food stamps, and on-behalf payments for fringe benefits and salaries.

Pass-through grants are those grants that are received by a recipient government to transfer to or spend on behalf of a secondary recipient. As a general rule, recipient governments should recognize all cash pass-through grants as revenue and expenditures or expenses in a governmental, proprietary, or trust fund. In those infrequent cases in which a recipient government serves only as a cash conduit-that is, it has no administrative or direct financial involvement in the program-the grant should be reported in an agency fund.

This Statement requires state governments to recognize their distributions of food stamp benefits as revenue and expenditures in the general fund or a special revenue fund, whether the state government distributes the benefits directly or through agents and whether the benefits are in paper or electronic form. State governments should report food stamp balances held by them or by their agents at the balance sheet date as an asset offset by deferred revenue.

On-behalf payments for fringe benefits and salaries are direct payments made by one entity (the paying entity) to a third-party recipient for the employees of another, legally separate entity (the employer entity). They include payments made by governmental entities on behalf of nongovernmental entities and payments made by nongovernmental entities on behalf of governmental entities. This Statement requires employer governments to recognize revenue and expenditures or expenses for these on-behalf payments. Revenue should equal the amounts that third-party recipients have received and that are receivable at year-end for the current fiscal year. For employer governments that are not legally responsible for the payments, expenditures or expenses should equal the amounts recognized as revenue. Employer governments that are legally responsible for the payments should follow accounting standards for that type of transaction to recognize expenditures or expenses and related liabilities or assets. This Statement requires governmental entities that make on-behalf payments for fringe benefits and salaries to classify those payments in the same manner that they classify similar cash grants to other entities.

The provisions of this Statement are effective for financial statements for periods beginning after June 15, 1995. Earlier application is encouraged.