A county government received a state grant of $2,000,000 to be used for a specific program. The grant requires the county to use the funds within the next fiscal year. The county uses modified accrual accounting for its governmental funds. As of the end of the current fiscal year, the county had not yet incurred any expenditures related to this grant. How should this grant be reported in the General Fund's financial statements at year-end?
- AAs a deferred inflow of resources of $2,000,000.
- BAs revenue of $2,000,000.
- CAs an increase in fund balance of $2,000,000.
- DAs a liability of $2,000,000.
Show answer & explanationAnswer & explanation
Correct answer: A. As a deferred inflow of resources of $2,000,000.
Under modified accrual accounting, revenues are recognized when they are both measurable and available. For grants that are expenditure-driven or time-restricted (like this one, implied by 'use the funds within the next fiscal year' for a specific program), if the availability criterion (collectible within current period or soon enough to pay current liabilities) is met but the eligibility requirements (like incurring expenditures or meeting time requirements) are not yet met, the resources are reported as a deferred inflow of resources. Since no expenditures have been incurred, the revenue recognition criteria are not met, and it's not a liability because the funds are not owed back unless conditions are violated.
Why the other options are wrong
- B. Incorrect. Revenue is not recognized until expenditures are incurred or time restrictions met, under modified accrual.
- C. Incorrect. Fund balance is affected by recognized revenues and expenditures, neither of which has occurred.
- D. Incorrect. A deferred inflow of resources is a separate financial statement element, not a liability, as the funds are not owed to the state unless conditions are violated.
Deferred Inflow of Resources (Governmental Funds - Grants)
In governmental funds using modified accrual, a deferred inflow of resources is recognized when assets are received (or measurable and available) but the corresponding revenue recognition criteria (e.g., incurring eligible expenditures, meeting time restrictions) have not yet been met.
- Result of modified accrual accounting.
- Recognized when assets are available but revenue recognition criteria not met.
- Represents an acquisition of net assets by the government that is applicable to a future reporting period.
- Not a liability, but a separate financial statement element.
Memory trick: M-A-D = Measurable, Available, Deferred (if not earned)