Project Pages

Conceptual Framework: Recognition

Project Description: The objective of this project is to develop recognition criteria for whether information should be reported in state and local governmental financial statements and when that information should be reported. This project ultimately will lead to a Concepts Statement on recognition of elements of financial statements.

Status:
Exposure Draft Redeliberations

Conceptual Framework: Recognition—Project Plan
 

Background: The Board frequently must decide whether an item of information should be recognized in the financial statements and when such an item should be recognized. In the past, the Board has relied on the conceptual framework of other standards setters and analogous examples from practice or previous standards to make such decisions. This method of making decisions tends to lead to certain inconsistencies in financial reporting standards and could result in too much reliance being placed on accounting concepts that were not developed for a governmental environment.

Thus, the project on recognition is needed to provide the GASB with conceptual guidance as to when elements of financial statements should be reported in specific financial statements. This will entail developing recognition criteria and will include a discussion of when elements of financial statements are recognized using different measurement focuses. For the GASB to make consistent financial reporting decisions, it is necessary to have (1) definitions of the elements of financial statements, (2) a basis for determining when elements of financial statements should be recognized in the financial statements, and (3) a basis for determining which measurement approach (for example, initial amounts or remeasured amounts) is appropriate for reporting the elements. The GASB issued a Concepts Statement on the definitions for the elements of financial statements in 2007 and on measurement of elements of financial statements in 2014. A conceptual framework project on recognition is necessary to complete the conceptual basis for reporting items in traditional financial statements.

Accounting and Financial Reporting Issues. The project is considering the following issues:
  1. What messages are financial statements conceptually attempting to convey? (In other words, what is the story that the financial statements attempt to communicate, or what questions should be answered by reading different financial statements and financial statements prepared using different measurement focuses? For example, the statement of cash flows answers the question, “What happened to cash during the year?”)
  2. What is the relationship among objectives of financial reporting (user needs), financial statements, and measurement focuses at the conceptual level?
  3. How does when an element is recognized affect the meaning that is to be conveyed by a particular financial statement?
  4. What are the fundamental recognition criteria necessary to report an element in a financial statement?
Project History:
  • Pre-agenda research approved: August 2005
  • Combined with measurement project on current technical agenda: December 2005
  • Task force established? Yes, but replaced by the task force appointed for the reexamination of the financial reporting model
  • Deliberations began: December 2007
  • Preliminary Views approved: June 2011
  • Comment period: July–September 2011
  • Public hearings held: October 2011
  • User interviews conducted regarding Preliminary Views: October–November 2011
  • Separated from measurement project: December 2011
  • Project placed on hold pending financial reporting model reexamination: January 2012
  • Deliberations recommenced in conjunction with the Financial Reporting Model Reexamination project: October 2015
  • Preliminary Views approved: September 2018.
  • Comment period: September 2018–February 2019
  • Public hearings and user forums held: March 2019
  • Redeliberations began: June 2019
  • Exposure Draft approved: June 2020
  • Comment period: June 2020–February 2021
  • Public hearings and user forums held: March and April 2021
  • Redeliberations began: May 2021
Current Developments: In September 2021, the Board redeliberated additional issues related to the short-term financial resources measurement focus and modified accrual basis of accounting. In November 2021, the Board redeliberated issued related to the economic resources measurement focus and accrual basis of accounting and the hierarchy of recognition.

Work Plan:
 
Board Meetings Topics to Be Considered
January 2023 Discuss draft of final concepts.
February 2023 Discuss preballot draft of a final Concepts Statement.
April 2023 Discuss ballot draft of a final Concepts Statement and consider for approval.

Conceptual Framework: Recognition—Recent Minutes


Minutes of Meetings, November 2–4, 2021

The Board continued redeliberations of the Conceptual Framework—Recognition and the Financial Reporting Model projects by discussing the name of the measurement focus and basis of accounting for governmental fund financial statements. The Board discussed whether any modifications should be made to the name short-term financial resources measurement focus as proposed in the Exposure Drafts, Recognition of Elements of Financial Statements (Concepts ED), and Financial Reporting Model Improvements (Financial Reporting ED), and tentatively decided that the name of the measurement focus should be retained.
 
The Board then discussed whether any changes should be made to the use of accrual to describe the basis of accounting proposed in the EDs and tentatively decided that the basis of accounting for governmental fund financial statements should be identified as the modified accrual basis of accounting.
 
The Board then discussed whether any modifications should be made to the description of the economic resources measurement focus (as proposed in paragraphs 7 and 8 of the Concepts ED). The Board tentatively decided that the proposed description of the economic resources measurement focus should be retained.
 
The Board next discussed whether to modify the language proposed in the Concepts ED related to the hierarchy of recognition. The Board tentatively decided that the proposed language related to the hierarchy of recognition should be retained. The Board also discussed whether the Basis for Conclusions should discuss recognition of note disclosures in relation to the hierarchy of recognition, in response to stakeholder comments. The Board tentatively decided that the Basis for Conclusions should not discuss the recognition of note disclosures in the hierarchy of recognition.

Minutes of Meetings, September 21–23, 2021
 
The Board continued deliberations on the short-term financial resources measurement focus and accrual basis of accounting (short-term method) to be used in presenting governmental fund financial statements.

The Board first discussed examples of transactions highlighting the similarities and differences between a near-term and a one-year recognition period and tentatively decided that the recognition period of the short-term method should continue to be one year.

Next, the Board discussed stakeholder feedback received pursuant to the Exposure Drafts, Recognition of Elements of Financial Statements, and Financial Reporting Model Improvements, related to the following five features of the short-term method:
  1. Description of financial assets and financial liabilities
  2. Payments made or received in advance of the due date
  3. Deferred outflows of resources and deferred inflows of resources
  4. Items arising from interfund events
  5. Allowance for doubtful accounts and receivables not paid by their due date. 
The Board tentatively decided to retain the language for financial liabilities proposed in the Exposure Drafts.

Subsequently, the Board discussed whether the proposed description of financial assets should be modified to accommodate the corpus of permanent funds and tentatively decided to retain the language proposed in the Exposure Drafts.

The Board then discussed whether the proposed description of financial assets should be modified for items consumable in lieu of cash that arise from long-term transactions. The Board tentatively decided to retain the language proposed in the Exposure Drafts for financial assets and to modify the language for the application of the short-term method to indicate that assets recognized include inventories and certain prepaid items.

The Board then discussed whether the proposed description of financial assets should be modified to include examples and tentatively decided to retain the language proposed in the Exposure Draft.

The Board considered whether the proposed guidance regarding payments made or received in advance of the due date should be modified to identify the specific elements to be recognized and tentatively decided to retain the language proposed in the Exposure Draft.
The Board then considered whether to carry forward to the final Statement the proposal that applicability to the period for outflows of resources and inflows of resources in the short-term method be determined using the concept of interperiod equity. The Board tentatively decided to retain that proposed guidance and to modify the guidance for the application of the short-term method to deferred outflows of resources and deferred inflows of resources to clarify that recognition of those elements is limited to those instances identified in GASB Statements.

The Board then discussed stakeholder feedback related to items arising from interfund events and tentatively decided that the proposal to recognize interfund events as short-term transactions should be carried forward to the final Statement.

The Board then discussed stakeholder feedback related to recognition of an allowance for doubtful accounts and to receivables not paid by their due date and tentatively decided that no additional recognition guidance is appropriate. However, the Board may consider whether amounts of receivables not paid by their due date should be classified as nonspendable fund balance at a subsequent meeting.

The Board then transitioned to discuss stakeholder feedback related to the following three additional features of the short-term method:
  1. Recognition of a liability for long-term debt issued for short-term purposes
  2. Continued classification of a transaction or other event as short term or long term (as determined upon inception) when there are changes in the existing binding arrangement’s terms or conditions
  3. Recognition of inflows or outflows of short-term financial resources for on-behalf payments for fringe benefits and salaries and direct vendor financings (for example, leases). 
The Board tentatively decided to broaden the exception for long-term debt issued for short-term purposes to include instances when a government is required to make payments that extend beyond one year from the inception of the transaction to finance a fixed amount for a short-term purpose. The Board then tentatively decided to broaden the examples provided for this exception to include wage settlements and accounts payable with similar extended payment terms. The Board considered whether short-term purpose should be defined as obtaining a good or service within the short-term time frame established by the short-term method (one year) but indicated that it would like to consider additional alternatives at a subsequent meeting.

The Board then discussed stakeholder feedback related to the classification of a transaction or other event as short term or long term when there are changes in the existing binding arrangement’s terms or conditions. The Board tentatively decided to modify the proposed guidance to instead require reclassification of the transaction or other event if amendments are made to the terms or conditions of the original binding arrangement that warrant such a change from short term to long term or vice versa prior to the fiscal year-end based on the concepts for the short-term method. The Board tentatively decided not to allow reclassification for such amendments that are made subsequent to the fiscal year-end but prior to the issuance of the financial statements. The Board tentatively decided to retain the proposal to require reclassification of a transaction or other event as either short term or long term when a new binding arrangement is entered into.

Regarding the recognition of inflows and outflows of short-term financial resources for on-behalf payments for fringe benefits, salaries, and direct vendor financings, the Board tentatively decided to carry forward the proposed requirement related to on-behalf payments for fringe benefits and salaries but to modify the proposed requirement related to direct vendor financings. The proposed requirement related to direct vendor financings would be modified to instead require recognition of assets or outflows of short-term financial resources, as applicable, for all direct vendor financings and inflows of short-term financial resources for direct vendor financings, with the exception of direct vendor financings for short-term purposes, which the Board tentatively determined should be reported as fund liabilities.

Minutes of Meetings, August 10–12, 2021

The Board continued redeliberations on the short-term financial resources measurement focus and accrual basis of accounting (short-term method) to be used in presenting governmental fund financial statements. The Board first discussed whether the recognition terms for the short-term method should be (1) the terms of the binding arrangement (or estimated payments if there is no binding arrangement or the binding arrangement does not include specific payment terms) as proposed in the Exposure Drafts, Recognition of Elements of Financial Statements, and Financial Reporting Model Improvements, or (2) the terms that are normal for governments. The Board tentatively decided to retain the terms proposed in the Exposure Drafts.

The Board then discussed whether the recognition method for long-term transactions and events used in the short-term method should be based on (1) the inception date of the transaction as proposed in the Exposure Drafts or (2) the balance sheet date. The Board tentatively decided that the recognition method for such transactions should be based on the inception date of the transaction (that is, transactions and other events for which the period from inception to conclusion is greater than the recognition period should be recognized when payments are due).

Lastly, the Board discussed whether the recognition period for the short-term method should be one year as proposed in the Exposure Drafts or a shorter “near-term” period. The Board tentatively decided that the recognition term should be one year.

Minutes of Meetings, June 30–July 2, 2021

The Board continued deliberations by discussing approaches to governmental fund financial statements suggested by stakeholders other than a conceptually based short-term approach.

First, the Board discussed stakeholder feedback recommending that governmental fund financial statements be excluded from the basic financial statements. The Board tentatively decided that the governmental fund financial statements should continue to be presented as part of the basic financial statements.

The Board then discussed stakeholder feedback recommending that governmental fund financial statements be presented applying a government’s budgetary basis of accounting. The Board tentatively decided that governmental fund financial statements should not be presented applying a government’s budgetary basis of accounting.

Next, the Board discussed stakeholder feedback recommending that governmental fund financial statements be presented applying the economic resources measurement focus and accrual basis of accounting. The Board tentatively decided that a short-term perspective should be retained in governmental fund financial statements, rather than the economic resources measurement focus.

Lastly, the Board discussed stakeholder feedback recommending retaining and modifying the current financial resources measurement focus and modified accrual basis of accounting rather than establishing a conceptual basis for recognition in governmental fund financial statements. The Board tentatively decided that the current financial resources measurement focus and modified accrual basis of accounting should not be retained and modified.

Minutes of Meetings, May 20–21, 2021

The Board reviewed and discussed feedback from comment letters, public hearings, and user forums related to the Exposure Drafts, Financial Reporting Model Improvements, and Recognition of Elements of Financial Statements. The Board agreed to redeliberate overarching topics related to recognition in governmental funds before addressing coordination and timing with the Revenue and Expense Recognition project. No tentative Board decisions were made regarding the substantive issues of either Exposure Draft.

Minutes Archive

Conceptual Framework: Recognition—Tentative Board Decisions to Date


The Board tentatively decided the following:
  • A measurement focus and basis of accounting that has a short-term perspective should be retained.
  • The name of the measurement focus for governmental fund financial statements should be short-term financial resources measurement focus.
  • The name of the basis of accounting for governmental fund financial statements should be modified accrual basis of accounting.
  • The recognition terms for the short-term financial resources measurement focus and accrual basis of accounting (short-term method) should be the terms of the binding arrangement (or estimated payments if there is no binding arrangement or the binding arrangement does not include specific payment terms).
  • The recognition method for long-term transactions and events in the short-term method should be based on the inception date of the transaction (Transactions and other events for which the period from inception to conclusion is greater than the recognition period should be recognized when payments are due).
  • The recognition period of the short-term method should be one year.
  • In the short-term method, financial assets include cash, assets that are available to be converted to cash, and assets that are consumable in lieu of cash. All liabilities are financial liabilities.
  • Applicability to the period for outflows of resources and inflows of resources in the short-term method should be determined using the concept of interperiod equity.
  • Under the economic resources measurement focus and accrual basis of accounting, elements of financial statements would be recognized when an item meets the definition of an element and the measurement of the item sufficiently reflects the qualitative characteristics of information in financial reports, subject to the limitations of financial reporting described in Concepts Statement No. 1, Objectives of Financial Reporting.
  • When evaluating an item for recognition in financial statements, the item would be evaluated using a hierarchy for recognition of elements. An item first would be evaluated against the definitions of assets and liabilities, then the definitions of deferred outflows of resources and deferred inflows of resources, and lastly the definitions of outflows of resources and inflows of resources. The item would be recognized as the first element for which it meets the definition. If the item does not meet any of the definitions, it would not be recognized.