Project Pages

Revenue and Expense Recognition

Project Description: The objective of this project is to develop a comprehensive application model for the recognition of revenues and expenses that arise from nonexchange, exchange, and exchange-like transactions, including guidance for exchange transactions that has not been specifically addressed in the current literature. The purpose for developing a comprehensive model is (1) to improve the information regarding revenues and expenses that users need 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:
Added to Current Agenda: April 2016
Added to Research Agenda: September 2015

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 it is based on pre-November 30, 1989 Financial Accounting Standard Board (FASB) and the American Institute of Certified Public Accountants (AICPA) pronouncements that was 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. Similar to the efforts on the standards for leases, these major changes in the FASB standards offer an opportunity to consider a performance obligation approach to the GASB’s standards. Therefore, the project will consider opportunities to consider developing guidance or to improve 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 the development of this project. Challenges identified included:
  • 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
  • Explaining unexpected nonexchange transactions because of the lack of disclosure requirements in Statements 33 and 36
  • 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. Concept 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 considering 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 the obligation is fulfilled. Should revenue be recognized at the time of sale or when (or as) the obligation is fulfilled?
  2. New FASB guidance 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?
  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 when the government is the customer. Should guidance be developed for these exchange expenses?
  5. Should additional information be disclosed regarding revenue transactions?
  6. Should additional information be disclosed regarding expense transactions that are not described in current GASB literature?
History:
Pre-agenda research approved: September 2015
Added to current technical agenda: April 2016
Task force established? Yes
Deliberations began: May 2016

Current Developments: In September through December 2016, the Board continued to develop the performance obligation model for revenue and expense recognition. In September, the Board deliberated the classification of sample revenue and expense transactions as having or not having performance obligations. In October, the Board deliberated alternatives for the recognition of revenue, both for transactions with performance obligations and transactions without performance obligations. In December, the Board deliberated alternatives for the recognition of expenses for transactions with performance obligations and transactions without performance obligations.

Work Plan:

Board Meetings Topics to be considered
April 2017:    Discuss exchange/nonexchange model for expenses.
May 2017:    Discuss application of the performance obligation model and exchange/nonexchange model to revenue transactions.
June 2017:    Discuss application of the performance obligation model and exchange/nonexchange model to expense transactions.
August 2017:    Task force meeting and discuss application of models as needed.
September 2017:    Discuss measurement.
October 2017: Review a draft of an Invitation to Comment.
December 2017:    Review preballot draft of an Invitation to Comment.
January 2018 (T/C):    Review ballot draft and consider an Invitation to Comment for clearance.
February–April 2018:    Comment period.
May 2018:    Conduct public hearings.
June 2018–February 2019:    Redeliberate issues based on due process feedback.
March 2019:    Task Force meeting and continue redeliberations, as needed.
May–June 2019:    Discuss presentation and disclosure issues.
July 2019:    Review draft of a Preliminary Views.
August 2019: Review preballot draft of a Preliminary Views.
October 2019:    Review ballot draft and consider Preliminary Views for approval.
November 2019–January 2020:    Comment period.
February 2020:    Conduct public hearings and field tests.
April–November 2020:    Redeliberate issues based upon due process feedback.
December 2020:    Review draft of Standards section of an Exposure Draft.
March 2021:    Review preballot draft of an Exposure Draft.
April 2021:    Review ballot draft and consider an Exposure Draft for approval.
May–July 2021:    Comment period.
August 2021:    Conduct public hearings.
September 2021–February 2022 (T/C):    Redeliberate issues based upon due process feedback.
April 2022:    Review preballot draft of a final Statement.
June 2022:    Review ballot draft and consider a final Statement for approval.

Revenue and Expense Recognition—RECENT MINUTES


Minutes of Meetings, March 7–9, 2017

The Board discussed the current alternatives being developed for the exchange/nonexchange model for presentation in the Invitation to Comment and tentatively concluded that the summary presented accurately depicted the alternatives. The Board then discussed the working definition of a performance obligation and instructed the project staff to analyze a potential amendment to the working definition to include the concept of groups of individuals as another party. The Board also reviewed other tentative Board decisions related to the performance obligation/no performance obligation model and tentatively reaffirmed those decisions.

The Board next discussed the recognition of revenue for the four types of nonexchange transactions described in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. The Board tentatively decided that the asset and revenue recognition provisions for derived taxes and imposed nonexchange, voluntary nonexchange, and government-mandated nonexchange transactions in Statement 33 are consistent with the conceptual framework. The Board also tentatively decided that the exchange/nonexchange model being developed for presentation in the Invitation to Comment will not present modifications to the provisions for asset and revenue recognition for derived tax revenue transactions.

The Board instructed the project staff to conduct additional research related to asset and revenue recognition provisions for imposed nonexchange transactions, specifically addressing the application of lien and levy date requirements and how the dates are described in enabling legislation. The Board discussed eligibility requirements for government-mandated and voluntary nonexchange transactions and tentatively decided that the four eligibility requirements in Statement 33 are consistent with the conceptual framework. The Board tentatively decided that the Invitation to Comment should not present modifications to three of the eligibility requirements: required characteristics of recipients, reimbursements, and contingencies. With respect to time requirements for voluntary nonexchange transactions, the Board instructed the project staff to conduct additional research regarding the recognition of pledges and beneficial interests in perpetual trusts reported by endowments.

Minutes of Meetings, January 17–19, 2017

The Board discussed the development of the exchange/nonexchange model for presentation in the Invitation to Comment. The Board tentatively decided to pursue presenting clarifying guidance for the current definitions of exchange and nonexchange.

The Board next discussed alternatives for recognition of revenue from exchange transactions that could be presented in the Invitation to Comment. The Board tentatively decided to develop alternatives for revenue from exchange transactions based on a conceptual foundation. For recognition of revenue from nonexchange transactions, the Board tentatively decided to pursue the development of two alternatives in the Invitation to Comment. The first alternative will explore the application of a performance obligation model to nonexchange transactions. The second alternative will explore potential modifications to existing requirements, specifically considering the conceptual framework.

Minutes of Meetings, December 5–8, 2016

The Board discussed the recognition of expenses using the performance obligation model. For transactions with performance obligations, the Board tentatively agreed to propose that expenses be recognized as the performance obligation is satisfied, either over time or at a point in time. Example transactions discussed by the Board included audit services, fuel purchases, payroll and compensated absences, and a government-mandated education program.

For transactions without performance obligations, the Board tentatively agreed to propose that expenses be recognized with respect to key characteristics of those transactions. Example transactions discussed by the Board included shared revenue, a government-mandated education program, and an equalization grant.

Minutes of Meetings, October 25–27, 2016

The Board discussed revenue recognition alternatives for example transactions with and without performance obligations. For transactions that have performance obligations, the Board tentatively decided that revenue should be recognized as the performance obligation is satisfied, either over time or at a point in time. Transactions of the nature discussed included parking permits, electric utility charges, tuition, building permits, and government-mandated educational programs (with a performance obligation).

For transactions that do not have performance obligations, the Board tentatively decided that revenue should be recognized with respect to the key characteristics identified for the specific transaction. Examples discussed by the Board included taxes on retail sales of goods, personnel income taxes, property taxes, and government-mandated educational programs (without a performance obligation).

The Board also discussed and tentatively agreed that transactions without performance obligations have a key characteristic that can be used to determine the timing of revenue recognition.

Minutes of Meetings, September 13–15, 2016

The Board continued deliberations by exploring the application of the working definition of a performance obligation to example transactions that are currently classified as exchange revenue, exchange expense, and nonexchange expense transactions. The Board tentatively agreed that the working definition of a performance obligation, with potential amendments to consider whether the transaction involves a specific resource beneficiary or a specific resource provider and, sufficiently allows for the assessment of whether transactions include a performance obligation.

Minutes of Meetings, August 10–12, 2016

The Board continued deliberations by exploring the application of the working definition of a performance obligation to revenue transactions that are currently classified as nonexchange transactions. The Board tentatively agreed that the working definition of a performance obligation is not sufficiently discriminating to allow for the assessment of whether transactions with purpose restrictions include a performance obligation; therefore, the definition should be expanded to make it more flexible. The Board also tentatively agreed that the ITC should present both of the following alternatives for applying the performance obligation definition to transactions with purpose restrictions: (1) consider whether the transaction involves a specific individual or entity as the resource beneficiary or (2) consider whether the transaction involves a specific individual or entity as the resource provider.

Minutes of Meetings, June 22–23, 2016

The Board continued deliberations for the Revenue and Expense Recognition project by discussing a working definition of the term performance obligation.

Four elements were considered for the working definition of performance obligation: (1) promise, (2) contract, (3) customer, and (4) distinct goods and services.

In regard to the first two elements, promise and contract, the Board tentatively agreed that the term contract is not needed because contracts are not the most prevalent means of raising revenue for governments. Therefore, the Board tentatively agreed to propose the use of the term binding promise in the working definition of a performance obligation to encompass a broader range of performance obligations.

For the third element, customer, the Board tentatively agreed to propose to replace that term with a broader term, another party, in the working definition to incorporate arrangements that may have multiple parties and to address a broader range of relationships. The Board also tentatively agreed to propose the following definition of another party:

Another party is any legally separate entity or person who takes part in a transaction with a government, such as a customer, a resource provider, a vendor, a resource recipient, or an employee.

The Board then discussed the fourth element of a performance obligation, distinct goods and services. Many transactions of a government may include multiple promises of goods or services; therefore, the Board tentatively agreed to propose the inclusion of the notion of distinct goods and services in the working definition of a performance obligation. Finally, the Board tentatively agreed to propose the following working definition of performance obligation with the understanding that as the project develops it may be revised:

A binding promise with another party to provide a distinct good, service, or other resource (or a bundle of goods, services, or other resources).
 
Minutes of Meetings, May 10–11, 2016

The Board began deliberations for the Revenue and Expense Recognition project by discussing the scope of the project and related scope issues. Due to the broad scope of this project, the Board tentatively decided to exclude some topics from deliberations associated with the project based on three guiding principles, with the understanding that as the project develops most transactions will be tested for potential application. The first principle is to exclude topics within the scope of current guidance that were developed considering the current conceptual framework. The second principle is to exclude financial transactions, such as investments, derivatives, leases and insurance, that require specialized guidance. The third and last principle is to exclude transactions arising from the recognition of capital assets and certain liabilities, such as depreciation, impairment expenses, and expenses related to the recognition of asset retirement obligations. The Board also tentatively agreed to keep certain topics in a to-be-determined category and decide at a later stage whether those topics should be included in this project. The criteria used to determine what topics to revisit later were topics for which current guidance exists but was developed before the conceptual framework and potential standards-setting topics. Examples of topics in the to-be-determined category are inventory, termination benefits, and compensated absences. The Board tentatively agreed to broadly describe the types of transactions that are included in the scope of this project rather than list all the transactions that may be included in the project to reduce the risk of inadvertently omitting topics.

Among the related scope issues that also were discussed at the meeting was the classification and presentation of revenue and expenses, which is being considered in the financial reporting model reexamination; therefore, the Board tentatively decided to not consider this issue as part of the scope of the revenue and expense recognition project. The Board also tentatively decided to include the issue of measurement of revenue and expense within the scope of this project and to initially develop a comprehensive revenue and expense recognition model based on the economic resource measurement focus and the full accrual basis of accounting. The Board tentatively decided that the revenue and expense recognition model for the governmental funds will be considered after the Board proposes a specific measurement focus and basis of accounting for governmental funds in the financial reporting model reexamination project.

The discussion ended with consideration of issues specific to small governments. The Board is aware that users of small governments’ financial information may have different needs; therefore, those needs will be considered while developing alternatives. The Board did not make any tentative decisions on this part of the discussion.

Revenue and Expense Recognition—TENTATIVE BOARD DECISIONS TO DATE


During initial deliberations, the Board tentatively agreed that:
  • The scope of this project will be defined on an exclusionary basis. Topics to be initially excluded from the scope will be based on three guiding principles:
    1. Topics that were developed considering the current conceptual framework,
    2. Topics related to financial transactions, such as investments, derivatives, leases, and insurance, and
    3. Topics related to transactions arising from the recognition of capital assets or certain liabilities.
  • The scope of this project includes a to-be-determined category. Topics in this category may be used in the form of examples during the development of the recognition models for the invitation to comment, but it is expected that the determination of whether these topics will be included in the scope of the project in further due process documents will not be made until after the invitation to comment phase. The following topics will be included in the to-be-determined category:
    1. Topics for which current guidance exists but was developed before the conceptual framework, and
    2. Potential standards-setting topics.
  • The scope of this project will not consider classification and presentation of revenue and expenses.
  • The scope of this project will consider the measurement of revenue and expenses.
  • The initial approach for developing revenue and expense recognition proposals will focus on developing a comprehensive revenue and expense recognition model based on the economic resource measurement focus and the full accrual basis of accounting.
  • The development of a revenue and expense recognition proposals for the governmental funds will be considered after the Board proposes a specific measurement focus and basis of accounting for governmental funds in the financial reporting model reexamination project.
  • The definition of a performance obligation should exclude a specific term (for example, contract, agreement, etc.) to describe the various types of arrangements that may give rise to revenue or expense for the purpose of broadening the model at this early stage of the project. The term binding promise should be used instead, in the working definition of a performance obligation to achieve this objective.
  • A term broader than customer should be used in the definition of a performance obligation; in this case, another party.
  • The definition of another party will be:
    • Any legally separate entity or person who takes part in a transaction with a government, such as a customer, a resource provider, a vendor, a resource recipient, or an employee.
  • The concept of distinct goods or services is relevant in the governmental environment to adequately identify performance obligations and should be included in the definition of a performance obligation.
  • The working definition of a performance obligation will be:
    • A binding promise with another party to provide a distinct good, service, or other resource (or a bundle of goods, services, or other resources).
  • The working definition of a performance obligation is not sufficiently discriminating to allow for the assessment of whether transactions with purpose restrictions include a performance obligation; therefore, the definition should be expanded to make it more flexible.
  • Two alternatives for applying the performance obligation definition to transactions with purpose restrictions should be included in the Invitation to Comment:
    • Consider whether the transaction involves a specific individual or entity as the resource beneficiary
    • Consider whether the transaction involves a specific individual or entity as the resource provider.
  • The performance obligation working definition, with the proposed modifications to consider specific resource beneficiaries or specific resource providers, allows for the assessment of whether the following transactions include a performance obligation:
    • Exchange transactions giving rise to revenue
    • Exchange transactions giving rise to expense
    • Nonexchange transactions giving rise to expense.
  • Revenue for transactions with performance obligations should be recognized as the performance obligation is satisfied, which could be over time or at a point in time.
  • Revenue for transactions without performance obligations should be recognized with respect to key characteristics of those transactions.
  • Expenses for transactions with performance obligations should be recognized as the performance obligation is satisfied, which could be over time (for example, as the services are being performed) or at a point in time.
  • Expenses for transactions without performance obligations should be recognized with respect to key characteristics of those transactions.
  • The development of the exchange/nonexchange model for the Invitation to Comment should include supplementing the current definitions of exchange and nonexchange with clarifying guidance.
  • For the recognition of revenue from exchange transactions, guidance should be developed based on a conceptual foundation.
  • For the recognition of revenue from nonexchange transactions, two alternatives should be developed:
    • The application of a performance obligation model
    • Incremental modifications to existing requirements, specifically considering the conceptual framework.
  • The asset and revenue recognition provisions for derived tax revenue transactions in Statement 33 are consistent with the conceptual framework, and potential modifications to the existing guidance will not be presented in the Invitation to Comment.
  • The asset and revenue recognition provisions for imposed nonexchange transactions in Statement 33 are consistent with the conceptual framework, and additional research will be conducted before considering whether potential modifications should be presented in the Invitation to Comment.
  • For government-mandated and voluntary nonexchange transactions (other than pledges and beneficial interests in perpetual trusts reported by endowments), revenue recognition that depends on the satisfaction of eligibility requirements (required characteristics of recipients, time requirements, a reimbursement requirement, and contingencies) is consistent with the conceptual framework, and potential modifications to the general guidance regarding eligibility will not be presented in the Invitation to Comment. Potential modifications to guidance for required characteristics of recipients, reimbursement requirements, and contingency requirements will not be presented in the Invitation to Comment. With respect to time requirements, additional research will be considered regarding pledges and beneficial interests in perpetual trusts reported by endowments before potential presentation in the Invitation to Comment.