Project Pages

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 address application issues identified in practice, based upon the results of the pre-agenda research on revenue for exchange and exchange-like transactions.

Status:
Invitation to Comment redeliberations began June 2018

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 a 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
Current Developments: Since August 2018, the Board has been considering analysis of multiple revenue and expense transactions in order to identify characteristics that could inform definitions needed for model development. That exploratory work concluded in January 2019. Additionally, the Board defined the scope of the project and tentatively agreed to the basic principles of an expense model at its January 2019 meeting. The Board will consider issues related categorization concepts at its April 2019 meeting.

Work Plan:
 
Board Meetings Topics to Be Considered
May 2019: Task force meeting.
February 2019–January 2020:    Deliberations regarding recognition and measurement issues, relevant to the model selected.
February 2020:    Review first draft of a Preliminary Views.
March 2020: Review preballot draft of a Preliminary Views.
May 2020:   Review ballot draft of a Preliminary Views and consider for approval.
June–September 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 the 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 2022: Public hearings.
May–November 2022:    Redeliberate issues based on 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, April 22−24, 2019

The Board began deliberations with a discussion of a refinement to the Revenue and Expense Recognition project scope. The Board tentatively agreed that interfund activity, including transactions between the primary government and its blended component unit, as provided in paragraph 112 of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as amended, would not be included in the scope of the project. Additionally, intra-entity transactions in the scope of Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, would not be included in the scope of the project.
 
Next, the Board discussed four characteristics identified in the exploratory work as related to the performance obligation/no performance obligation model. The Board tentatively decided not to rely on service relatable or distinct goods or services, and specific beneficiary, in any categorization definitions. Additionally, the Board tentatively decided to rely on binding arrangements and rights and obligations that articulate in equivalent terms as characteristics useful for any categorization definitions; however, the Board acknowledged that these characteristics require further refinement.
 
The Board then discussed three characteristics related to the exchange/nonexchange model, two of which were identified in the exploratory work. The Board tentatively agreed not to rely on the characteristics of cost recovery and benefit as distinguishing characteristics of revenue and expense transactions. In addition, the Board considered the concept of value, the central characteristic in current literature used to distinguish between exchange and nonexchange transactions, and tentatively agreed not to rely on value to develop any categorization definitions.
 
Next, the Board discussed whether the amount of consideration is representational of the type of transaction and tentatively agreed not to rely on the amount of consideration as a means to categorize revenue and expense transactions because it produces conceptually incongruent results.
 
As a result of previous tentative decisions, the Board tentatively agreed to develop a revenue and expense recognition model that would classify transactions into two categories: Category A transactions and Category B transactions (the AB Model). The Board considered various concepts as the foundational model proposal and tentatively agreed that Category A transactions would be considered as comprised of two flows, an acquisition coupled with a sacrifice (or a sacrifice coupled with an acquisition). The Board tentatively agreed that the acquisition coupled with the sacrifice can be identified as rights and obligations that articulate in equivalent terms. While the right represents the right to receive consideration in a transaction, the obligation represents the requirement to perform via action or inaction. The Board also tentatively agreed that Category A transactions may include reciprocal and nonreciprocal transactions and include binding arrangements such as contracts, grant agreements, memorandum of understanding, interlocal agreements, and legally enforceable purchase orders.
 
Conversely, the Board tentatively agreed that Category B transactions would be considered as comprised of a single flow—that is, an acquisition without a sacrifice or a sacrifice without an acquisition; whereas the obligation is to transfer resources, the right is to receive or collect resources. The Board tentatively agreed that the types of binding arrangements included in Category B transactions include enabling legislation and purpose-restricted grant agreements. The Board considered those basic concepts and tentatively agreed to continue refining the categories. Lastly, the Board tentatively agreed that based on the current proposal, the earnings recognition approach should no longer be considered in this project.

Minutes of Meetings, January 29−31, 2019
 
The Board began deliberations with discussions about the expense model. The Board tentatively agreed that model assumption two—the classification of inflows should not determine the classification of outflows—still is valid. The Board tentatively agreed that model assumption one—inflows and outflows, although interrelated through articulation, are of equal importance in the resource flow statement—still is valid. Next, the Board tentatively agreed that a single revenue and expense recognition model should be developed that is applicable to all governments; without explicitly segregating business-type activities governments. Additionally, the Board tentatively agreed to propose that accounting for regulated operations, as described in paragraphs 476—500 of Statement No. 62, Codification of Accounting and financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, be outside the scope of this project. The Board then tentatively agreed to propose a government centric expense model as follows:
 
      Costs incurred by governments by procuring goods and services should first be classified into categories, for example, exchange/nonexchange or performance obligation/non-performance obligation, to facilitate recognition; classification definitions have not been proposed at this time. Once a transaction is properly classified, expense recognition would be proposed if the flow of resources fails the definition of an asset and a deferred outflow of resources. Recognition consideration is based on the flow’s applicability to a reporting period.
      The procurement of goods and services by governments may generate rights, resources, or assets, for which the government directs the use in the provision of services. Consequently, the benefit generated by a government’s procurement of goods and services always should be construed to accrue to the government’s constituency, in the fulfillment of its public purpose mission.

Next, the Board discussed remaining information about grant outflows and other exploratory work. Board members considered observations about the analysis of grant outflows, shared revenue, and PILOT programs. Furthermore, the Board discussed workers compensation, unemployment, and disability benefits. Next, the Board shared additional observations about the analysis of the benefit and specific beneficiary characteristics for exchange outflows. Lastly, the Board discussed information provided about Medicaid.  The discussion of this exploratory work was not intended to result in any tentative Board conclusions.

Minutes of Meetings, December 17−19, 2018

The Board began by discussing basic assumptions that are necessary to build the revenue and expense recognition model. The first assumption tentatively agreed upon is that inflows and outflows are of equal importance. The second assumption tentatively agreed upon is that the classification of outflows should be considered independently from the classification of inflows. The third assumption tentatively agreed upon is that for accounting and financial reporting purposes, a government is an economic entity in providing public services, and it is not acting as an agent for the citizenry. The fourth assumption tentatively agreed upon is to include a symmetry assumption, to the extent possible. The Board tentatively decided to include a symmetry assumption in the development of a proposed revenue and expense recognition model, acknowledging that there may be circumstances in which symmetry may not be feasible. The fifth assumption tentatively agreed upon is the inclusion of a consistent view—that is, from the resource provider perspective—in the analysis of distinct goods and services. The Board then discussed the need to develop additional assumptions as the project develops, as well as the possibility of adjusting the five assumptions considered in this meeting. The Board noted that based on the overall relevancy of the going concern assumption, there was not a need to identify it as a specific assumption to be applied in this project.

Next, the Board re-deliberated scope issues. First, the Board tentatively decided to retain the exclusionary approach (that is, to identify transactions and other events that are not included in the scope of the project) with periodic discussions to ensure that the clarity of the topics is maintained. The Board then tentatively agreed that the scope of the project should be limited to the first communication method identified in paragraph 29 of Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: recognition in basic financial statements (with limited disclosure requirements [if applicable]). Next, the Board tentatively agreed to exclude from the scope of this project any display requirements for revenues or expenses. Furthermore, the Board tentatively decided to recommend that this project not include any proposal related to the classification of revenues and expenses as operating or nonoperating. The Board also tentatively agreed to exclude from the scope requirements for required supplementary information or supplementary information. Next, the Board tentatively agreed to base all measurement guidance on Concepts Statement No. 6, Measurement of Elements of Financial Statements. Additionally, the Board tentatively agreed to include collectability, right of return, and warranties as measurement topics in the scope of the project. Next, the Board tentatively agreed that modifications for guidance for contingencies would not be included in the scope of this project, noting that conclusions in existing literature—Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements—may be relied upon. The Board then tentatively agreed that development of the subsequent due process document in this project would be based only on the economic resources measurement focus and accrual basis of accounting.

Next, the Board considered the three exclusion principles included in the Invitation to Comment, Revenue and Expense Recognition. The Board tentatively agreed to propose an exclusion principle that would remove from the scope of the project items related to capital assets and long-term debt, such as depreciation expense, interest income and expense, inventory remeasurement, as well as gains and losses from the impairment or remeasurement of capital assets, inventory, and long-term debt. The Board tentatively agreed to propose a second exclusion principle that would remove from the scope of the project: (1) investments, (2) financial guarantees, (3) derivative instruments, (4) financings such as leases, and (5) insurance. Next, the Board tentatively agreed to propose a third exclusionary principle that would remove from scope of the project all postemployment benefit topics, including current effective pronouncements as well as the current projects undertaken related to postemployment benefits. Next, the Board tentatively agreed to propose a narrative paragraph in the scope description that would discuss scope exclusions of “current guidance (existing pronouncements and projects the Board is currently addressing in other projects)” from the scope of this project.

Next, the Board tentatively agreed to include in the scope of this project the following current guidance:
  • NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, as follows:
    • Revenue recognition:  paragraphs 62–69
    • Expenditure recognition: paragraphs 70–73
  • Statement No. 6, Accounting and Financial Reporting for Special Assessments—revenue and expense recognition provisions would be included. Provisions related to capital assets, long-term debt, or fund financial reporting issues included in Statement 6 would not be included in the scope of this project.
  • Statement No. 21, Accounting for Escheat Property, paragraph 5, provides recognition guidance for escheat revenue. Topics related to recognition of a liability or fund financial reporting would not be included in the scope of this project.
  • Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments—paragraph 16, which provides recognition provisions for revenues and expenses.
  • Statement 62—the topics proposed for inclusion in the scope of this project are listed below. Those topics would be included to the extent that revenue or expense recognition is involved; other accounting and financial reporting issues related to those topics would not be considered included in the scope of this project.
    • Revenue Recognition for Exchange Transactions, paragraph 23
    • Revenue Recognition When Right of Return Exists, paragraphs 24–28
    • Construction-Type Contracts—Long-Term, paragraphs 114–123
    • Nonmonetary Transactions, paragraphs 272–281
    • Sales of Real Estate, paragraphs 282–349
    • Broadcasters, paragraphs 385–388
    • Cable Television Systems, paragraphs 389–399
Lastly, the Board discussed the overall scope description and tentatively agreed to recommend a description, based on the tentative decisions previously noted, as a first step, acknowledging that additional modifications may be needed depending on the development of the project.

Minutes of Meetings, November 14−16, 2018

The Board continued its discussion of expenses, focusing on the general characteristics of transactions identified during the August 2018 Board meeting. The Board also discussed donations, endowments, and escheat property in relation to the same general characteristics. No tentative conclusions were reached.

Minutes of Meetings, October 2−4, 2018
 
The Board discussed different types of primarily federal government grants and the challenges grants present from a classification perspective.  The Board also discussed how grants could fit into the general characteristics of revenue transactions discussed during the August 2018 Board meeting. The Board then considered a project staff analysis related to using a specific beneficiary and that rights and obligations articulate in equivalent terms as characteristics of revenue transactions. No tentative conclusions were reached.

Minutes of Meetings, August 22−24, 2018

The Board discussed the conceptual importance of recognition and the challenges associated with the scope and definitions in the Revenue and Expense project that may need to be addressed differently than in other GASB projects. The Board also discussed stakeholder feedback regarding exchange-like transactions. Next, the Board discussed general characteristics of different revenue transactions, including exchange, exchange-like, and nonexchange transactions. This discussion covered existing literature, research, and definitions proposed in the Invitation to Comment, Revenue and Expense Recognition. The Board considered analysis related to cost-recovery, a characteristic of revenue transactions mentioned during public hearings. Finally, the Board considered the rationale for conducting exploratory work about the characteristics of certain grants, a topic that will be addressed in the next Board meeting. No tentative decisions were reached.

Minutes of Meetings, July 10−12, 2018

The Board discussed the development of the project approach and decided to refine the definitions included in each model presented in the Invitation to Comment (ITC), Revenue and Expense Recognition, as a preparatory step for model selection. The Board also discussed stakeholder feedback received in public hearings related to the ITC. No tentative decisions were reached.

Minutes of Teleconference, June 18, 2018
 
The Board discussed stakeholder feedback received in comment letters related to the Invitation to Comment, Revenue and Expense Recognition. No tentative decisions were reached.

Minutes Archive

Revenue and Expense Recognition—TENTATIVE BOARD DECISIONS TO DATE


Model Assumptions

The Board tentatively decided to propose the following model assumptions:
  1. Inflows and outflows are of equal importance in resource flows statements
  2. Inflows and outflows should be classified independently, and not in relationship to each other
  3. The government is an economic entity and not an agent of the citizenry
  4. Symmetrical considerations, to the extent possible, should be included in revenue and expense recognition
  5. A consistent viewpoint, from the resource provider perspective, will be applied in the revenue and expense analysis.
The AB Model

The Board tentatively agreed to the following model development decisions:
  1. To develop a model in which revenue and expense transactions would be organized into two categories: Category A and Category B (the AB Model). While the concepts included in the tentative descriptions of Category A and Category B are foundational to the model development, the concepts require further refinement.
    1. Category A transactions would be considered as comprised of two flows, an acquisition coupled with a sacrifice (or a sacrifice coupled with an acquisition). The acquisition coupled with the sacrifice can be identified as rights and obligations that articulate in equivalent terms. While the right represents the right to receive consideration in a transaction, the obligation represents the requirement to perform via action or inaction. Category A transactions may include reciprocal and nonreciprocal transactions. Binding arrangements in Category A transactions include contracts, grant agreements, memorandums of understanding, interlocal agreements, and legally enforceable purchase orders.
    2. Category B transactions would be considered as comprised of a single flow, that is an acquisition without a sacrifice or a sacrifice without an acquisition. The obligation would represent the requirement to transfer resources. The right would represent the ability to receive or collect resources. Binding arrangements in Category A transactions include enabling legislation and purpose-restricted grants.
    3. To refine these descriptions, the Board would rely on two characteristics identified in the exploratory work: (1) the binding arrangement and (2) rights and obligations that articulate in equivalent terms.
  2. To move away from five characteristics identified during the exploratory work. The Board tentatively agreed:
    1. Not to rely on service relatable or distinct goods or services in any categorization definition
    2. Not to rely on a specific beneficiary in any categorization definition
    3. Not to rely on the characteristic of cost recovery as a distinguishing characteristic of revenue and expense transactions
    4. Not to rely on the characteristic of benefit as a distinguishing characteristic of revenue and expense transactions
    5. Not to rely on value to develop categorization definitions
    6. Not to rely on consideration as a means to categorize revenue and expense transactions.
  3. To propose that the earnings recognition approach no longer be considered in this project.
Scope

The Board tentatively agreed to propose the following scope description:

The scope of the project includes classification, recognition, and measurement of revenues and expenses from a broad range of transactions, unless those transactions have been explicitly excluded from the scope of the project via one of the three exclusionary principles:
  1. Certain Assets (Capital and Inventory) and Certain Long-Term Liabilities Exclusion—this exclusion would remove from the scope of the project depreciation expense, interest income or expense, and gains and losses derived from impairment or remeasurement of capital assets, inventory, or long-term debt.
  2. Financial Instruments Exclusion—this exclusion would remove from the scope of the project the following items: (a) investments, (b) financial guarantees, (c) derivative instruments, (d) financings such as leases, and (e) insurance.
  3. Postemployment Benefits Exclusion—this exclusion would remove from the scope of the project all guidance and projects related to pensions, OPEB, compensated absences, and termination benefits.
Current pronouncements, such as Statement No. 81, Irrevocable Split-Interest Agreements, and any guidance that may result from current projects, would be excluded from the scope of the project, unless the Board subsequently decides to include them in the scope of this project.

The following pronouncements would be considered in the scope of the project:
  1. NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, as follows:
    1. Revenue recognition: paragraphs 62–79
    2. Expenditure recognition: paragraphs 70–73
  2. Statement No. 6, Accounting and Financial Reporting for Special Assessments, revenue and expense recognition provisions only  
  3. Statement No. 21, Accounting for Escheat Property, paragraph 5—recognition guidance for escheat revenue  
  4. Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance 
  5. Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions 
  6. Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraph 16  
  7. Statement No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues 
  8. Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements—the list of topics proposed for inclusion in the scope of the project are shown below. Those topics would be included to the extent that revenue or expense recognition is involved; other accounting and financial reporting issues related to those topics would not be considered included in the project. 
    1. Revenue Recognition for Exchange Transactions, paragraph 23 
    2. Revenue Recognition When Right of Return Exists, paragraphs 24–28 
    3. Construction-Type Contracts—Long-Term, paragraphs 114–123 
    4. Nonmonetary Transactions, paragraphs 272–281 
    5. Sales of Real Estate, paragraphs 282–349 
    6. Broadcasters, paragraphs 385–388 
    7. Cable Television Systems, paragraphs 389–399 
Additionally, topics related to measurement such as collectability, right of return, and warranties would be included in the scope of the project, as well as topics for which limited guidance exists, such as expense recognition, sale of capital assets (including intangibles), and other complex transactions that include revenue and expense recognition. Certain topics may be removed from the scope of the project if the Board is currently developing guidance for them.

Furthermore, the following pronouncements would be considered outside the scope of the project:
  1. Statement 62: Accounting for regulated operations, paragraphs 476-500
  2. Statement 34: Topics related to interfund activity, including transactions between the primary government and its blended component unit, paragraph 112, as amended
  3. Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues: Topics related to intra-entity transactions
Finally, topics related to display (such as operating or nonoperating classifications) or disclosure for revenues or expenses are outside the scope of the project.

Expense Model Conclusions

The Board tentatively agreed to the following expense model conclusions:
  1. To develop a single revenue and expense recognition model based on the conceptual framework that does not distinguish between general purpose governments and BTA governments.
  2. To have a government centric expense model as follows:
    1. Costs incurred by governments by procuring goods and services should first be classified into categories, for example, exchange/nonexchange or performance obligation/non-performance obligation, to facilitate recognition; classification definitions have not been proposed at this time. Once a transaction is properly classified, expense recognition would be proposed if the flow of resources fails the definition of an asset, and a deferred outflow of resources. Recognition consideration is based on the flow’s applicability to a reporting period.
    2. The procurement of goods and services by governments may generate rights, resources, or assets, for which the government directs the use in the provision of services. Consequently, the benefit generated by a government’s procurement of goods and services should always be construed to accrue to the government’s constituency, in the fulfillment of its public purpose mission.