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COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 In applying the susceptible to accrual concept to intergovernmental revenues,the legal and contractual requirements of the numerous individual programs are used as guidance. There are essentially two types of these revenues. In one,monies must be expended on the specific purpose or project before any amounts will be paid to the County;therefore,revenues are recognized based upon the expenditures recorded. Most construction grants and many operating grants fall into this category. In the other,monies are virtually unrestricted as to purpose of expenditure and are usually revocable only for failure to comply with prescribed compliance requirements. These resources are reflected as revenues at the time of receipt or earlier if the susceptible to accrual criteria are met. The County reports unearned revenue in its fund financial statements(see Note 7). Unearned revenues arise when potential revenue does not meet both the"measurable"and"available" criteria for recognition in the current period. In subsequent periods,when both revenue recognition criteria are met,the liability for unearned revenue is removed from the combined balance sheet and revenue is recognized. Expenditures are recognized under the modified accrual basis of accounting in the accounting period in which the fund liability is incurred. Exceptions to this general rule include:(a) accumulated compensated absences and claims and judgments which are recognized as expenditures when paid;(b)liabilities related to municipal solid waste landfill closure and postclosure care costs;and(c)principal and interest on general long-term debt which are recognized as expenditures when due. In accordance with GASB Statement No.20,Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the County applies all applicable GASB pronouncements as well as the following pronouncements issued on or before November 30, 1989,unless those pronouncements conflict with or contradict GASB pronouncements;Financial Accounting Standards Board statements and interpretations,Accounting Principles Board opinions,and Accounting Research Bulletins of the Committee on Accounting Procedures. Encumbrances The general,special revenue,and capital projects follow encumbrance accounting under which purchase orders,contracts and other commitments are recorded as a reserve of fund balance and provide authority for the carryover of appropriations to the subsequent year in order to complete these transactions. Encumbrances outstanding at year end are reported as reservations of fund balances and do not constitute expenditures or liabilities because the commitments will be honored during the subsequent year. -49-