CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A county government received a state grant of $1,000,000 to be used for road maintenance. The grant stipulated that the funds must be spent within the next fiscal year. The county uses modified accrual accounting. At the end of the current fiscal year, $300,000 of the grant funds had been expended. How should the remaining $700,000 be reported in the governmental funds' financial statements at year-end?
- AFund Balance - Restricted
- BDeferred Inflow of Resources
- CRevenue
- DUnearned Revenue
Show answer & explanationAnswer & explanation
Correct answer: B. Deferred Inflow of Resources
Under modified accrual accounting, for expenditure-driven grants, revenue is recognized only to the extent that expenditures have been incurred. The unexpended portion of the grant is considered a deferred inflow of resources until the qualifying expenditures are made in the subsequent period.
Why the other options are wrong
- A. Fund Balance - Restricted reflects amounts that are already recognized as revenue but are subject to external restrictions, not unearned amounts.
- C. Only the $300,000 expended portion would be recognized as revenue.
- D. While conceptually similar to unearned revenue, GASB standards specifically use 'Deferred Inflow of Resources' for this type of transaction in governmental funds.
Expenditure-Driven Grant (Modified Accrual)
For governmental funds using modified accrual, revenue from expenditure-driven grants is recognized only when the qualifying expenditures are incurred. Unspent amounts are recorded as Deferred Inflows of Resources.
- Revenue recognition tied to incurring expenditures.
- Unspent funds are 'Deferred Inflows of Resources'.
- Reflects the current financial resources measurement focus.
Memory trick: Grant funds: Spend first, then earn, or defer.