Revenue and Expense Recognition
Project Description: The objective of this project is to develop a comprehensive application model for the classification, recognition, and measurement of revenues and expenses. The purpose for developing a comprehensive model is (1) to improve the information regarding revenues and expenses that users receive to make decisions and assess accountability, (2) to provide guidance regarding exchange and exchange-like transactions that have not been specifically addressed, (3) to evaluate revenue and expense recognition in the context of the conceptual framework, and (4) to consider application issues identified in practice, based upon the results of the pre-agenda research on revenue for exchange and exchange-like transactions.
Invitation to Comment issued: February 2018
- Accounting and Financial Reporting Issues
- Project History
- Current Developments
- Work Plan
- Recent Minutes
- Tentative Board Decisions
- Task Force
- Project staff:
Revenue and Expense Recognition—PROJECT PLAN
Exchange Transactions That Are Not Specifically Addressed in Existing Literature
Background: This project was prompted by three factors: (1) common exchange transactions that are not specifically addressed in existing GASB literature; (2) the results of the Financial Accounting Foundation’s (FAF) Post-Implementation Review (PIR) of GASB Statements No. 33, Accounting and Financial Reporting for Nonexchange Transactions and No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues; and (3) the development of the GASB's conceptual framework.
GASB standards provide guidance for revenue recognition for nonexchange transactions in Statements 33 and 36. However, GASB standards provide limited guidance for exchange and exchange-like transactions and that guidance is based on pre-November 30, 1989 Financial Accounting Standard Board (FASB) and the American Institute of Certified Public Accountants (AICPA) pronouncements incorporated through Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. That guidance has not been reexamined and generally has been applied through custom and practice.
Additionally, the FASB recently issued FASB Accounting Standards Codification® (ASC) Topic 606, Revenue from Contracts with Customers. These major changes in the FASB standards offer an opportunity to consider a performance obligation approach to the GASB’s standards. Therefore, the project is considering developing guidance or improving existing guidance on revenue recognition related to:
- Exchange and exchange-like transactions having single elements
- Exchange and exchange-like transactions having multiple elements
- The differentiation between exchange-like and nonexchange transactions.
The FAF conducted a PIR of Statements 33 and 36 and published its findings in November 2015. Among those findings, the PIR report showed that Statements 33 and 36: (1) resolved the issues underlying their stated needs, (2) produced decision-useful information for users of financial statements, and (3) could be applied as intended. However, there were areas that could be considered in this project, including:
- Distinguishing between eligibility requirements and purpose restrictions
- Determining when a transaction is an exchange or a nonexchange transaction
- Using the availability period concept consistently across governments
- Applying time and contingency requirements.
Statements 33 and 36 were issued in the 1990s, prior to the completion of key parts of the conceptual framework through the issuance of Concepts Statement No. 4, Elements of Financial Statements, in 2007. Concepts Statement 4 includes the definition of two additional elements in financial statements, deferred inflows and deferred outflows of resources. Therefore, an evaluation of the recognition of nonexchange transactions against the conceptual framework would be necessary.
Accounting and Financial Reporting Issues: The project is addressing the following issues:
- Specific guidance for exchange transactions is limited and current guidance indicates revenue from exchange transactions should be recognized when the exchange takes place. Differences in practice have emerged as to whether the exchange takes place when the sale occurs or the obligation is fulfilled. Should revenue be recognized at the time of sale or when (or as) the obligation is fulfilled?
- FASB guidance that takes effect in 2018 introduces a performance obligation approach to recognition of revenue. Should the performance obligation approach be used for transactions of a government? Should the approach be used only for exchange transactions? Should the approach be used for both revenue and expenses?
- Statements 33 and 36 were issued prior to additional development of the GASB Concepts Statements. Should the guidance be revised in light of the Concepts Statements?
- GASB literature contains guidance for certain exchange expenses, such as compensated absences and postemployment benefits. Guidance does not exist for most other common exchange expenses, including salaries and circumstances in which the government is the customer. Should guidance be developed for these exchange expenses?
- Pre-agenda research approved: September 2015
- Added to current technical agenda: April 2016
- Task force established? Yes
- Deliberations began: May 2016
- Task force meeting held: August 2017
- Invitation to Comment issued: January 2018
|Board Meetings||Topics to Be Considered|
|May 2018:||Public hearings.|
|June 2018 (T/C):||Discuss stakeholder general feedback provided in comment letters.|
|July 2018:||Discuss stakeholder general feedback provided in public hearings. Consider scope issues.|
|August 2018:||Discuss classification definition issues based on due process feedback. Consider expense classification schema.|
|October 2018:||Consider classification process in the context of case studies.|
|November 2018–March 2019:||Redeliberate issues based on due process feedback. Consider recognition and measurement issues.|
|April 2019:||Task force meeting and continue redeliberations, as needed.|
|June 2019–January 2020:||Deliberations regarding measurement issues.|
|February 2020:||Review first draft of a Preliminary Views.|
|March 2020:||Review preballot draft of a Preliminary Views.|
|May 2020:||Review ballot draft and consider a Preliminary Views for approval.|
|June–November 2020:||Comment period and field test.|
|October 2020:||Public hearings.|
|December 2020–July 2021:||Redeliberate classification, recognition, and measurement issues based on due process feedback.|
|August 2021:||Task force meeting and continue deliberations, as needed.|
|September 2021:||Review first draft of standards section of an Exposure Draft.|
|November 2021:||Review preballot draft of an Exposure Draft.|
|December 2021:||Review ballot draft and consider an Exposure Draft for approval.|
|January–March 2022:||Comment period.|
|April 2021–November 2022:||Redeliberate issues based upon due process feedback.|
|December 2022:||Review draft standards section of a final Statement.|
|February 2023:||Review preballot draft of a final Statement.|
|March 2023:||Review ballot draft and consider a final Statement for approval.|
Revenue and Expense Recognition—RECENT MINUTES
Minutes of Meetings, January 23−24, 2018
The Board reviewed a ballot draft of the Invitation to Comment, Revenue and Expense Recognition, and provided clarifying edits. After reviewing the Invitation to Comment and providing clarifying edits, the Board did not object to the issuance of the Invitation to Comment.
Minutes of Meetings, December 12−14, 2017
The Board discussed the characteristics of the financial information to be presented in the Invitation to Comment. The Board tentatively decided that issues associated with the recognition of revenues and expenses, as well as the revenue and expense recognition models to be presented in the Invitation to Comment, would produce financial information that meets the needs of users; results from economic or financial events affecting the assessment of the governmental reporting entity; is relevant to reporting objectives; and falls within an appropriate information category for general purpose external financial reports. Thus, the Board tentatively concluded that the information in the proposals that the Invitation to Comment would include clearly is within the scope of the GASB’s authority.
Next, the Board tentatively decided a 90-day comment period is appropriate for the Invitation to Comment.
The Board then reviewed a preballot draft of the Invitation to Comment, Revenue and Expense Recognition, and did not object to clarifying edits. The Board did not object to moving forward with a ballot draft of an Invitation to Comment for discussion at the January 2018 meeting.
Minutes of Meetings, October 31−November 2, 2017
The Board continued its review of a proposed definition of a performance obligation. The Board did not object to including the concept of a relationship between the rights and obligations in a binding arrangement in the Invitation to Comment.
The Board next discussed Chapter 2, the exchange/nonexchange model, Chapter 3, the performance obligation/no performance obligation model, and Chapter 4, additional topics. The Board also discussed clarifying edits to Chapters 2, 3, and 4.
Minutes of Meetings, September 27 and 28, 2017
The Board discussed issues related to the impact of the concept of right of return on the two models to be presented in the Invitation to Comment (ITC): Model 1—the exchange/nonexchange model and Model 2—the performance obligation/no performance obligation model. In the development of the ITC, the Board tentatively agreed that:
- The definition of a performance obligation should encompass a binding arrangement, specificity of the other party, and a series of goods and services.
- The performance obligation/no performance obligation model should include the following:
- Classify a transaction as to whether it contains a performance obligation on the basis of the definition of a performance obligation and a binding arrangement.
- If there is a performance obligation, recognize the transaction on the basis of the amount of consideration, allocation of consideration, and satisfaction of the performance obligation.
- If there is no performance obligation, recognize the transaction on the basis of eligibility requirements.
- The right of refund should be considered a contingency and not a stand-ready-to-perform liability.
- The right of refund should be considered broadly and be applicable to both goods and services.
- The right of refund should have limited discussion in the ITC.
- The earnings recognition approach should not consider the refund period.
- For exchange transactions containing a performance obligation, an unexercised right of refund held by a government for purchased goods or services should not be recognized as an asset and should follow the contingencies provisions in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.
- For nonexchange transactions, the right of refund should not be considered further.
The Board then discussed the organization of the ITC and Chapter 1, the introduction, as well as clarifying edits to Chapter 1.
Minutes of Meetings, August 10 and 11, 2017
The Board discussed feedback from the task force and the crafting of the Invitation to Comment. The Board tentatively agreed that the Invitation to Comment should discuss two models: (1) the performance/no performance obligation model and (2) the exchange/nonexchange model. The Board also tentatively agreed that the exchange/nonexchange model should include the eligibility requirements and the earnings based recognition approaches.
Minutes of Task Force Meeting, August 9, 2017
The task force provided feedback on the topics that the Board is considering for inclusion in an Invitation to Comment, which will be issued for public comment. The task force provided comments on how the discussions in each section of the Invitation to Comment can be made more clear and complete.
The task force first discussed the Background section of the Invitation to Comment. Suggested topics that could be included in this section included the objective of the project, history of previous GASB guidance related to revenue and expense transactions, a reference to guidance issued by other standards setters, results of previous project stages, reasons GASB added the project to its agenda, and the project scope. Some task force members also suggested further clarification on the reasons behind the project and the benefits and challenges of the models.
The task force then discussed three potential models: (1) the exchange/nonexchange model, (2) the performance/no performance obligation model, and (3) the exchange/nonexchange model with performance obligation elements. For each model, the task force members provided feedback on the explanations of the application of the different models. Some task force members suggested further clarification of how each model would impact their individual governments, such as business-type activities. In addition, some task force members recommended further examples to highlight the diversity in practice. Some task force members also suggested that issues applicable to exchange-like and right-of-return practice issues be addressed. Regarding performance obligations, some task force members expressed interest in the Invitation to Comment addressing how the performance obligation definition would impact purpose restrictions.
Minutes of Meetings, June 28–29, 2017
The Board considered the project staff’s research regarding when an enforceable legal claim is established. That term comes from existing guidance that applies to imposed nonexchange transactions—primarily property taxes. The research surveyed state statutes that address when levies, liens, and assessments are established. The Board tentatively agreed that the Invitation to Comment should describe the diversity in statutory provisions and practice. Modifications to the existing nonexchange literature, however, will not be proposed and no questions will be presented. The discussion will indicate that the Board is expected to address this issue in a future due process document as part of this project.
Minutes of Meetings, May 23–25, 2017
The Board tentatively decided that the obligation for expense notion should be further developed within the earnings-based approach for expense recognition of exchange transactions in the Invitation to Comment.
The Board reviewed a narrative discussion and illustrative graphic of the exchange/nonexchange model to be presented in the Invitation to Comment. The Board tentatively decided that both the narrative discussion and illustration depict the tentative decisions made thus far in the development of the exchange/nonexchange model.
The Board also reviewed proposed examples to be presented in the Invitation to Comment that illustrate recognition issues for the performance obligation/no performance obligation model and performance obligation approach (items 1–4 below); for the exchange/nonexchange model (items 5 and 6); and for both models (items 7 and 8).
- The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with identifying a performance obligation.
- The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with the notion of a group in the definition of a performance obligation.
- The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with determining when a performance obligation is satisfied.
- The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with expense recognition using a performance obligation.
- The Board tentatively decided that the proposed example sufficiently demonstrates the issues associated with classifying a transaction as exchange or nonexchange.
- The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with determining when an entity is entitled to revenue or obligated for expense.
- The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with endowment pledges and beneficial interests in perpetual trusts.
- The Board tentatively decided that proposed example sufficiently demonstrates the issues associated with contingencies.
Revenue and Expense Recognition—TENTATIVE BOARD DECISIONS TO DATE
An Invitation to Comment, Revenue and Expense Recognition, was issued in February 2018.