HCV & Revenue Recognition

October 2017

We have been receiving several inquiries about whether or not a PHA can accrue HUD Held Reserves (HHR) at their year-end. The answer is, it depends. HUD issued Accounting Brief #19 explaining when HHR would be considered revenue to the PHA. 
The typical PHA follows accounting principles developed by the Governmental Accounting Standards Board (GASB), particularly GASB Statement No. 33: Accounting and Financial Reporting for Non-exchange Transactions. This statement provides guidance for revenue recognition for Housing Assistance Payments (HAP) and administrative fees. When determining how to recognize revenue, GASB Statement No. 33 requires that the non-exchange transaction be categorized into one of four categories. The revenue recognition criteria are different under each category. The four categories of non-exchange transaction are:
  1. Derived tax revenues 
  2. Imposed non-exchange revenues 
  3. Government-mandated non-exchange transactions
  4. Voluntary non-exchange transactions
HUD contends that the funds the PHAs receive from HUD to fund the HCV program are considered voluntary non-exchange transactions. GASB Statement No. 33 defines a voluntary non-exchange transaction as a transaction in which a government gives or receives value without directly receiving or giving something of equal value in return, and that these transactions (typically resulting from legislative or contractual agreements) are entered into willingly by two parties.
Revenue recognition criteria for voluntary non-exchange transactions differ under GASB Statement No. 33 based on the eligibility requirements that are typically contained in legislative or contractual agreements and depending on whether the PHA is using the accrual or modified accrual basis of accounting. Regardless of the basis of accounting used, PHAs will recognize revenue when all revenue recognition criteria have been met.

The section below discusses the revenue recognition criteria associated with PHAs using the accrual basis and modified accrual basis of accounting.

Revenue recognition for Non-exchange transactions 

Accrual Basis of Accounting PHAs that treat the HCV program as an enterprise fund use the accrual basis of accounting. A PHA using the accrual basis of accounting should recognize revenue under a voluntary non-exchange transaction when all of the following conditions are met: 
1. Measurable: Simply stated, the recipient must know the amount of the transaction or be able to reasonably estimate the amount. For PHAs, this condition is not normally problematic as HUD provides funding letters and schedules to PHAs as well as PIH Notices that provide for the calculation of HAP and administrative fees.
2. Probable collection: In order for revenue to be recognized, the amount of revenue must be likely to be collected. For HUD funding, the likelihood of collection of funds owed to the PHA by HUD is normally considered probable.
3. All eligibility requirements are met: All eligibility requirements that are found in the legislative or contractual agreements governing the funds must be met. The eligibility requirements may specify eligible recipients, when funding can be or must be used by, or provisions for reimbursements and/or contingencies.
a) â€‹Required characteristics of recipients: The recipient must have the characteristics specified by the provider. In the case of the HCV program, PHAs are deemed to meet this requirement since HUD has engaged in a contract (the HCV Annual Contribution Contract (ACC)) with the PHA for the administration of the program.

b) Time requirements Time requirements specify the period or periods when resources are required to be used or when use may begin. Time requirements exist for both HAP and administrative fee funds. For HAP funding, time requirements are normally related to appropriation language that does not allow the funds to be used until January 1 of each calendar year for HAP expenses beginning January 1 and later. This requirement means that current year HAP funding may not be used to fund prior year HAP deficits. Current HAP funding may only be used prospectively.
In addition, increments on the HCV ACC funding exhibits have both a beginning date of term and an ending date of term. Revenue will not be available for that increment before the beginning date of the term. Similarly, renewal funding may be available after the end of term for an increment, but renewal funding will also have a new beginning date of term and a new ending date of term, i.e., a time requirement. 
Administrative fees have a time requirement that relate to the requirement that administrative fees are partially earned on the number of vouchers that are under HAP contract as of the first day of each month. 

c) Reimbursements: This is a requirement that the receiver of funding must actually incur an eligible expense to receive the funding (reimbursed). This has not been an eligibility requirement of the HCV program since 2005 when the program was converted from a cost reimbursement program for HAP funding to a formula/budget-based program.

d) Contingencies: This is a requirement that funds will be given based on a contingency, which is usually a fund matching requirement of some sort. In the case of the HCV program, there is no such requirement.
4. Legal enforceable claim exists: The last consideration in the recognition of revenue is determining if the grantee has an enforceable legal claim to resources based on specifications of enabling legislation or contractual requirements. If a determination has been made that the grantee does not have an enforceable legal claim, then revenue should not be recognized. For example, a local government generally cannot force the state or federal government to pay promised resources and is not likely to bring legal action against the state or federal government; therefore, there is no legal claim and revenue should not be recognized. Accordingly, PHAs are not normally considered to have a legal enforceable claim to undisbursed HAP funds held by HUD (for example, program reserves).
Based on the above requirements, if the PHA had a positive restricted net positon (RNP) at year-end, then the PHA cannot accrue any HHR. But, if the PHA had negative RNP at year-end, then the PHA could accrue a receivable from HUD and record HAP revenue to bring RNP to a zero balance. Since the PHA incurred a HAP payment, the PHA would can record the revenue. 

If you have questions regarding matters discussed above, please contact Brian Alten.

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