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CITY OF CENTERVILLE, MINNESOTA NOTES TOFINANClAL STATEMENTS DECEMBER 31, 2004 Note I: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the year in which the resources are measurable and become available. Non-exchange transactions, in which the City receives value without directly giving equal value in return, include property taxes, grants, entitlement and donations. On an accrual basis, revenue from property taxes is recognized in the year for which the tax is levied. Revenue from grants, entitlements and donations is recognized in the year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are required to be used or the year when use is first perntitted, matching requirements, in which the City must provide local resources to be used for a specified purpose, and expenditure requirements, in which the resources are provided to the City on a reimbursement basis. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Deferred revenue arises when assets are recognized before revenue recognition criteria have been satisfied. Grants and entitlements received before eligibility requirements are met are also recorded as deferred revenue. On the modified accrual basis, receivables that will not be collected within the available period have also been reported as deferred revenue in the fund financial statements. The preparation of financial statements in conforntity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The City reports the following major governmental funds: The Generalfund is the City's primary operating fund. It accounts for all fmancial resources of the City, except those required to be accounted for in another fund. The Debt Service fund accounts for the resources accumulated and payments made for principal and interest on long-term general obligation debt of governmental funds. The 2004 Municipal Street Project fund accounts for the resources to complete the street project. The Hunter's Crossing.fund accounts for the resources to complete the capital project development. The City reports the following major proprietary funds: The Water fund accounts for the activities of the water distribution system the City maintains. The Sewer fund accounts for the activities of the City's sewage collection operations. Private-sector standards of accounting and financial reporting issued prior to December I, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). Governments also have the option offollowing subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. As a general rule the effect of interfund activity has been eliminated from government-wide financial statements. Exceptions to this general rule are charges between the City's water and sewer function and various other functions of the City. E1imination of these charges would distort the direct costs and program revenues reported for the various fimCtiODS concerned. -19-