When is the early recognition option for debt service expenditure recognition NOT appropriate?

The early recognition option for debt service expenditure recognition is primarily appropriate under certain conditions that ensure the funds will be available to meet the obligation. In the case illustrated by the answer option, debt service made from a special revenue fund does not typically qualify for early recognition because special revenue funds are designed to account for the proceeds of specific revenue sources that are restricted to specific purposes.

When debt service is incurred and it is expected that it will be paid from a special revenue fund, the recognition of the expenditure should align with the availability of the resources specific to that fund. This often means that the funds may not be available until they are received, thus making early recognition less suitable. The accounting principle of recognizing expenditures in the period to which they relate means that if the resources have restrictions, the expenditure should not be recognized early as it may not reflect the entity's liability accurately.

In contrast, if an obligation is due shortly after the fiscal year-end, or if the transfer of resources is nondiscretionary, these conditions might allow for early recognition because they indicate that the necessary resources are either assured or required. Therefore, the specific nature of resources within a special revenue fund leads to the understanding that early recognition is not appropriate in such cases.