Grants, entitlements, or shared revenues recorded in the general and special revenue funds should be recognized as revenue in the accounting period in which they become susceptible to accrual (they are measurable and available). In applying these criteria, the financial statement preparer must consider the legal and contractual requirements of the particular financial assistance being considered.

Financial assistance in the form of shared revenues and entitlements is often restricted by law or contract more in form than in substance. Only a failure on the part of the recipient to comply with prescribed regulations would cause a forfeiture of the resources. Such resources are often recorded as revenue at the time of receipt, or earlier if the susceptibility to accrual criteria are satisfied. If entitlements and shared revenues are collected in advance of the period that they are intended to finance, they are recorded as deferred revenue.

Grants are nonexchange transactions that would be classified as either government-mandated or voluntary nonexchange transactions. The accounting for both of these transactions is similar and is described earlier in this chapter. Many of the government-mandated grants that are received by governments are expenditure driven. These are covered later in this section.

In many of the remaining grants, the key accounting component is when eligibility requirements are met, which determine when it is appropriate for the recipient government to recognize the grant as revenue. If the actual cash is received before the eligibility requirements have been met, the cash should be recorded as a deferred revenue until the eligibility requirements are met.

On the other hand, if the eligibility requirements have been met and the cash has not yet been received by the recipient government, the recipient government would record a receivable and revenue for the grant revenue that it is owed. For recording this amount in a governmental fund on the modified accrual basis of accounting, the availability criteria should be examined to see if
the revenue should be recognized or recorded as deferred revenue. In practice, grant revenue is usually received within a timeframe where the availability criteria are met (this is also discussed
later, in the expenditure-driven revenue section).

Taken From : Governmental Accounting Made Easy

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