When should a governmental fund recognize a liability for rebatable arbitrage?

A governmental fund should recognize a liability for rebatable arbitrage when amounts are due and payable. This aligns with the accrual accounting principle, which emphasizes recognizing liabilities when they are incurred or become legally enforceable rather than when they are estimated or budgeted.

In the case of rebatable arbitrage, the liability arises from the requirement to rebate certain earnings on invested bond proceeds to the federal government when certain conditions are met. Therefore, the obligation to pay this rebate becomes a liability for the fund only when the payment is due. Recognizing the liability at this point provides a more accurate representation of the government's financial position and ensures that the financial statements reflect actual liabilities that the fund is responsible for satisfying. This practice contributes to the integrity of financial reporting in governmental accounting, ensuring stakeholders are fully informed of the government's obligations.