CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsEasy
A city government received $500,000 from a federal grant to fund a specific program. The grant requires the city to incur eligible expenditures before it can request reimbursement. As of year-end, the city had incurred $200,000 in eligible program expenditures but had not yet requested reimbursement. How should the city record the unspent portion of this grant in its General Fund at year-end, assuming modified accrual accounting?
- AAs deferred inflows of resources.
- BAs grant revenue.
- CAs deferred revenue.
- DAs restricted fund balance.
Show answer & explanationAnswer & explanation
Correct answer: A. As deferred inflows of resources.
Under modified accrual accounting, unearned grant revenues, especially those contingent on future expenditures, are classified as deferred inflows of resources. Only the portion for which expenditures have been incurred is recognized as revenue.
Why the other options are wrong
- B. Only the $200,000 incurred in expenditures can be recognized as revenue, not the unspent portion.
- C. While conceptually similar, GASB standards specifically use 'deferred inflows of resources' for unearned governmental fund revenues.
- D. Restricted fund balance relates to amounts that are available but legally restricted, not unearned revenues.
Deferred Inflows of Resources (Governmental Funds - Grants)
In governmental fund accounting (modified accrual), deferred inflows of resources represent an acquisition of net assets by the government that is applicable to a future reporting period.
- Used for unearned revenues, often from grants.
- Revenue recognition criteria (measurable and available) not yet met.
- Similar to unearned revenue but a specific GASB classification.
Memory trick: Future money, not yet ours to spend or count.