Project Pages

Revenue and Expense Recognition

Project Description: The overall objective of this project is to develop a comprehensive, principles-based model that would establish categorization, recognition, and measurement guidance applicable to a wide range of revenue and expense transactions. Achieving that objective will include: (1) development of guidance applicable to topics for which existing guidance is limited, (2) improvement of existing guidance that has been identified as challenging to apply, (3) consideration of a performance obligation approach to the GASB’s authoritative literature, and (4) assessment of existing and proposed guidance based on the conceptual framework. The expected outcome of the project is enhanced quality of information that users rely upon in making decisions and assessing accountability.

Status:
Preliminary Views approved June 2020

Revenue and Expense Recognition—PROJECT PLAN


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 GASBs conceptual framework.

Exchange Transactions That Are Not Specifically Addressed in Existing Literature

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 62. 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.
Post-Implementation Review of Statements 33 and 36

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 nonexchange transaction
  • Using the availability period concept consistently across governments
  • Applying time and contingency requirements.
Conceptual Framework

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:
  1. 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 when the obligation is fulfilled. Should revenue be recognized at the time of sale or when (or as) the obligation is fulfilled?
  2. FASB guidance introduced 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?
  3. 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?
  4. 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?
Project History:
  • 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
  • Comment period: January–April 2018
  • Public hearings held: May 2018
  • Redeliberations began: June 2018
  • Task force meeting held: May 2019
  • Preliminary Views approved: June 2020
  • Comment period: July 2020–February 2021
Current Developments: In June 2020, the Board issued a Preliminary Views, Revenue and Expense Recognition. The comment period ends February 26, 2021. Public hearings and user forums are scheduled for March and April 2021.

Work Plan:
 
Board Meetings Topics to Be Considered
January–February 2021: Comment period continues.
October 2020–April 2021: Field test.
March–April 2021: Public hearings and user forums.
May 2021–November 2022: Redeliberate issues based on due process feedback and deliberate additional potential provisions that will be included in the proposed Statement.
January 2023: Review draft standards section of an Exposure Draft of a proposed Statement.
February 2023: Review illustrations.
May 2023: Review preballot draft of an Exposure Draft of a proposed Statement.
June 2023: Review ballot draft of an Exposure Draft of a proposed Statement and consider for approval.
July–October 2023: Comment period.
November 2023: Public hearings.
December 2023–August 2024: Redeliberate issues based on due process feedback.
October 2024: Review draft standards section of a final Statement.
January 2025: Review preballot draft of a final Statement
March 2025: Review ballot draft of a final Statement and consider for approval.

Revenue and Expense Recognition—RECENT MINUTES


Minutes of Meetings, October 20-22, 2020

The Board discussed the project deliberation approach for the Revenue and Expense Recognition project. The Board decided to postpone project deliberations, primarily associated with measurement issues, until stakeholder feedback is provided on the Preliminary Views, Revenue and Expense Recognition.

Minutes of Meetings, June 16–18, 2020

The Board discussed whether the expected benefits of the guidance proposed in the Preliminary Views justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that based on the information that is available at this time, the expected benefits of the proposals in the Preliminary Views justify the anticipated implementation and ongoing perceived costs of application.

Next, the Board reviewed a ballot draft of the Preliminary Views and provided clarifying edits. The Board then voted unanimously to approve the issuance of the Preliminary Views, Revenue and Expense Recognition.

Minutes of Meetings, May 6–8, 2020

The Board began discussing three terms, binding arrangement, transaction, and recognition unit of account as they relate to the application of the short-term financial resource measurement focus and accrual basis of accounting to transactions in the scope of this project. The Board tentatively decided that the assessment of short-term and long-term items in governmental funds should be made based on the recognition unit of account, which is each performance obligation for Category A transactions.

Next, the Board reviewed and provided clarifying edits on a preballot draft of the Preliminary Views, Revenue and Expense Recognition. The Board then agreed to move forward with a ballot draft of the Preliminary Views, which will be discussed at the June 2020 Board meeting.

Minutes of Meetings, March 24–26, 2020

The Board began deliberations by discussing the recognition of revenue and expense related to certain Category B transactions. The Board tentatively decided to propose five subcategories for Category B transactions: (a) imposed, (b) derived, (c) contractual binding arrangement, (d) general aid to governments, and (e) shared revenue.
 
For general aid to government transactions, the Board tentatively decided to propose that the resource provider and resource recipient recognize liabilities and assets when the payments are due, if (a) the resource provider has appropriated funds for the provision of resources, and the period applicable to the appropriation has begun, and (b) the resource provider has determined that it intends to provide the resources to the resource recipient. Additionally, the Board tentatively agreed to propose that in circumstances in which the resource provider cancels the appropriation, the determination be made based on the resource provider’s intent. That is, if the resource provider decides to postpone the payment, a payable and a receivable should be reported at the end of the fiscal period by the parties. This proposition effectively provides an exception to the first recognition criterion previously noted. Furthermore, if the resource provider decides that the omission is not a postponement, neither a payable nor a receivable should be reported at the end of the fiscal period by the parties.
 
For shared revenue transactions, the Board tentatively decided to propose that, in circumstances in which there is a periodic appropriation, the resource provider and resource recipient recognize liabilities and assets when the payments are due, if (a) the resource provider has appropriated funds for the provision of resources, and the period applicable to the appropriation has begun, and (b) the resource provider has determined that it intends to provide the resources to the resource recipient. The Board also tentatively agreed to propose that, in circumstances in which there is a continuing appropriation, the resource provider and resource recipient recognize liabilities and assets when the underlying transaction that is shared has occurred, if (a) the resource provider has appropriated funds for the provision of resources, and the period applicable to the appropriation has begun, and (b) the resource provider has determined that it intends to provide the resources to the resource recipient. Additionally, the Board tentatively decided to propose that in circumstances in which the resource provider cancels the appropriation, the determination be made based on the resource provider’s intent. That is, if the resource provider decides to postpone the payment, a payable and a receivable should be reported at the end of the fiscal period by the parties. This proposition effectively provides an exception to the first recognition criterion previously noted. Furthermore, if the resource provider decides that the omission is not a postponement, neither a payable nor a receivable should be reported at the end of the fiscal period by the parties.
 
Next, the Board deliberated collectibility in the categorization component and measurement component of the model. The Board reaffirmed its prior decision to not include collectibility in the categorization component either as a scope criterion or as a categorization aspect. The Board also tentatively decided that the installment method and the cost recovery method (footnote 8 of Statement No. 62, Codification of Accounting and Financial  Reporting Guidance Contained in  Pre-November 30, 1989 FASB and AICPA Pronouncements) for revenue recognition would not be carried forward because collectibility is not considered a scope issue. Furthermore, the Board tentatively decided to include existing collectibility guidance for the measurement component in the upcoming due process document (a Preliminary Views), for both Category A and Category B transactions. That is, revenue from both categories would be reported net of uncollectible amounts when there is a related revenue transaction, and no modification would be proposed to the existing relationship between collectibility and contingencies. Additionally, the Board tentatively decided to propose combining existing guidance on collectibility, including raising Category B literature to Category A literature, in the measurement chapter in the upcoming Preliminary Views. Lastly, the Board tentatively decided not to propose modifications to discounts and implied price concessions in the upcoming Preliminary Views; however, the topic would be highlighted in the measurement chapter as an issue that the Board would consider when developing proposed guidance for variable consideration in the next due process document.
 
The Board then discussed the draft materials to be included in the Preliminary Views.

Minutes of Meetings, February 11–13, 2020

The Board began deliberations by discussing the recognition of Category A expense transactions. The Board tentatively decided to propose that expense transactions be recognized over time in circumstances in which one of the two proposed criteria are met: (a) the government simultaneously receives and consumes the benefits provided by the counterparty’s performance as the counterparty performs or (b) the counterparty’s performance does not create a resource with an alternative use to the government, and the counterparty has an enforceable right to payment for performance completed to date. The Board also tentatively decided to propose that expense be recognized at the point in time at which neither of the two proposed criteria above are met. The Board considered an additional over time criterion (consistent with revenue recognition over time) in which the counterparty’s performance would create or enhance an asset such as work in process. The Board tentatively agreed that this criterion is not suitable application guidance for expense recognition over time because it requires capitalization of an outflow, a topic outside the scope of the project. In addition, the Board tentatively agreed to propose that the probability of compliance with grant requirements in the future would not be considered an expense recognition attribute (consistent with its revenue recognition conclusion). The Board tentatively concluded that its rationale is that the flow of resources meets the definition of a receivable (an asset). The assessment of whether the outflow is an expense cannot be made because the compliance with certain grant requirements takes place in the future.

The Board then discussed the organization of the materials to be included in the Preliminary Views.

Minutes of Meetings, January 7–9, 2020

The Board began deliberations by discussing a performance obligation recognition approach and application. The Board tentatively decided to propose that the fulfillment of a performance obligation for both revenue and expense recognition be described as the point at which there is a transfer of control over a resource. The Board then discussed revenue recognition over time or at a point in time. The Board tentatively decided to propose that revenue be recognized over time in Category A revenue transactions in the circumstances in which one of the three proposed criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; (b) the entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced; (c) the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. The Board also tentatively decided to propose that revenue be recognized at the point in time at which control of resources is transferred in Category A revenue transactions in the circumstances in which none of the three proposed criteria above are met. In addition, the Board agreed that recognition guidance for a series of distinct goods or services in Category A revenue transactions should be developed at a later date in conjunction with consideration or allocation of consideration.

The Board tentatively agreed to propose that a practical portfolio consideration be provided for recognition in the assessment of both binding arrangements and performance obligations if the government reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ significantly from applying this guidance to each binding arrangement and to each performance obligation. Additionally, the Board tentatively decided to propose that in circumstances in which it is probable that a provider will not provide the resources or will require a return of resources because eligibility requirements are no longer met or it becomes apparent that a recipient will not comply with purpose restrictions within the specified time limit, the provider recognize a receivable and the recipient recognize a liability, consistent with current provisions in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. The Board also tentatively decided to propose that probability of compliance with grant requirements not be a revenue recognition attribute.

Next, the Board deliberated recognition principles of revenue and expense in Category B transactions. The Board tentatively agreed to propose that the primary criterion for the recognition of revenue or expense in Category B transactions be the time requirements, as defined in Statement 33 and specified in the binding arrangement for the transaction. The Board also tentatively decided to propose that in the absence of time requirements in the binding arrangement related to a Category B transaction, revenue and expense be recognized when the corresponding asset and liability are recognized. For derived Category B transactions, the Board tentatively decided to propose that an asset be recognized when the underlying transaction or activity on which the tax or fee is imposed occurs or when the resources are received, whichever occurs first, and revenue be recognized when the underlying transaction or activity occurs. For imposed Category B property tax transactions, the Board tentatively decided to propose that revenue be recognized in the period for which the tax is imposed. For imposed Category B regulatory fee transactions, the Board tentatively decided to propose that revenue be recognized when the individual or entity commits the act of applying and qualifies for a permit to engage in a regulated activity. For imposed Category B punitive fee transactions, the Board tentatively decided to propose that revenue be recognized when the individual or entity has committed or omitted an act which is a violation of a law for which a punitive fee is prescribed by the governing body’s legislation. For voluntary Category B transactions, the Board tentatively decided to propose that pledges for endowments be recognized as deferred inflows of resources when the promise is established and revenue be recognized when resources are received and the government can begin to comply with time requirements

The Board then discussed measurement topics. The Board reaffirmed its prior decision to base the measurement of revenues and expenses on the most liquid flow; that is, assets in revenue transactions and liabilities in expense transactions. Furthermore, the Board tentatively agreed to propose that measurement of assets and liabilities in the scope of this project be described as relying on the transaction amount. The Board also tentatively agreed to propose that the transaction amount be described as an allocated amount for Category A revenue and expense transactions. Specific provisions related to the allocation methodology will be developed after the upcoming due process document (a Preliminary Views). In addition, the Board tentatively agreed that the provision in Statement 33 requiring disclosure of transactions that are not recognized because they either are not measurable or are not probable of collection not be included in the upcoming due process document. For Category A grants in which each dollar of allowable cost establishes the fulfillment of a performance obligation, the Board tentatively decided to propose that the revenue measurement be based on the established grant reimbursement rate.

Finally, the Board provided feedback about the status of the project with respect to the upcoming Preliminary Views document and also provided feedback on a proposed illustration.

Minutes Archive

Revenue and Expense Recognition—TENTATIVE BOARD DECISIONS TO DATE


The Preliminary Views, Revenue and Expense Recognition, was approved in June 2020.

Board deliberations on the project will resume after stakeholder feedback is provided on the Preliminary Views, Revenue and Expense Recognition.