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 have 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 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:
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 GASB's 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 No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. That guidance has not been reexamined and generally has been applied through custom and practice.

Additionally, the FASB recently issued FASB Accounting Standards Codification® (ASC) Topic 606, Revenue from Contracts with Customers. These major changes in the FASB standards offer an opportunity to consider a performance obligation approach to the GASB’s standards. Therefore, the project is considering developing guidance or improving existing guidance on revenue recognition related to:
  • Exchange and exchange-like transactions having single elements
  • Exchange and exchange-like transactions having multiple elements
  • The differentiation between exchange-like and nonexchange transactions.
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
  • 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. 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 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. FASB guidance that takes effect in 2018 introduces a performance obligation approach to recognition of revenue. Should the performance obligation approach be used for transactions of a government? Should the approach be used only for exchange transactions? Should the approach be used for both revenue and expenses?
  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?
  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?
Project 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 May through August 2017, the Board completed an initial review of relevant issues that it believes should be studied at this stage of the project. In anticipation of issuing an Invitation to Comment, the Board held a public meeting with the project task force in August 2017. The focus of that meeting was (1) to update the task force on the current status of the project and (2) to receive input on the content of the Invitation to Comment.

Work Plan:

Board Meetings Topics to be considered
December 2017:    Review preballot draft of an Invitation to Comment.
January 2018:    Review ballot draft and consider an Invitation to Comment for clearance.
February–April 2018:    Comment period.
May 2018:    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 first draft of a Preliminary Views.
August 2019: Review preballot draft of a Preliminary Views.
October 2019:    Review ballot draft and consider a Preliminary Views for approval.
November 2019–January 2020:    Comment period and field test.
February 2020:    Public hearings.
April–November 2020:    Redeliberate issues based upon due process feedback.
December 2020:    Review first 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:    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, October 31−November 2, 2017

The Board continued its review of a proposed definition of a performance obligation. The Board did not object to including the concept of a relationship between the rights and obligations in a binding arrangement in the Invitation to Comment.

The Board next discussed Chapter 2, the exchange/nonexchange model, Chapter 3, the performance obligation/no performance obligation model, and Chapter 4, additional topics. The Board also discussed clarifying edits to Chapters 2, 3, and 4.

Minutes of Meetings, September 27 and 28, 2017

The Board discussed issues related to the impact of the concept of right of return on the two models to be presented in the Invitation to Comment (ITC): Model 1—the exchange/nonexchange model and Model 2—the performance obligation/no performance obligation model. In the development of the ITC, the Board tentatively agreed that:
  • The definition of a performance obligation should encompass a binding arrangement, specificity of the other party, and a series of goods and services.
  • The performance obligation/no performance obligation model should include the following:
    • Classify a transaction as to whether it contains a performance obligation on the basis of the definition of a performance obligation and a binding arrangement.
    • If there is a performance obligation, recognize the transaction on the basis of the amount of consideration, allocation of consideration, and satisfaction of the performance obligation.
    • If there is no performance obligation, recognize the transaction on the basis of eligibility requirements.
  • The right of refund should be considered a contingency and not a stand-ready-to-perform liability.
  • The right of refund should be considered broadly and be applicable to both goods and services.
  • The right of refund should have limited discussion in the ITC.
  • The earnings recognition approach should not consider the refund period.
  • For exchange transactions containing a performance obligation, an unexercised right of refund held by a government for purchased goods or services should not be recognized as an asset and should follow the contingencies provisions in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.
  • For nonexchange transactions, the right of refund should not be considered further.
The Board next discussed the relationship of the performance obligation/no performance obligation model to the Board’s conceptual framework. The Board tentatively decided that the ITC should indicate that an unsatisfied performance obligation meets neither the definition of an asset nor the definition of a liability.
The Board then discussed the organization of the ITC and Chapter 1, the introduction, as well as clarifying edits to Chapter 1.

Minutes of Meetings, August 10 and 11, 2017

The Board discussed feedback from the task force and the crafting of the Invitation to Comment. The Board tentatively agreed that the Invitation to Comment should discuss two models: (1) the performance/no performance obligation model and (2) the exchange/nonexchange model. The Board also tentatively agreed that the exchange/nonexchange model should include the eligibility requirements and the earnings based recognition approaches.

Minutes of Task Force Meeting, August 9, 2017

The task force provided feedback on the topics that the Board is considering for inclusion in an Invitation to Comment, which will be issued for public comment. The task force provided comments on how the discussions in each section of the Invitation to Comment can be made more clear and complete.

The task force first discussed the Background section of the Invitation to Comment. Suggested topics that could be included in this section included the objective of the project, history of previous GASB guidance related to revenue and expense transactions, a reference to guidance issued by other standards setters, results of previous project stages, reasons GASB added the project to its agenda, and the project scope. Some task force members also suggested further clarification on the reasons behind the project and the benefits and challenges of the models.

The task force then discussed three potential models: (1) the exchange/nonexchange model, (2) the performance/no performance obligation model, and (3) the exchange/nonexchange model with performance obligation elements. For each model, the task force members provided feedback on the explanations of the application of the different models. Some task force members suggested further clarification of how each model would impact their individual governments, such as business-type activities. In addition, some task force members recommended further examples to highlight the diversity in practice. Some task force members also suggested that issues applicable to exchange-like and right-of-return practice issues be addressed. Regarding performance obligations, some task force members expressed interest in the Invitation to Comment addressing how the performance obligation definition would impact purpose restrictions.

Minutes of Meetings, June 28–29, 2017

The Board considered the project staff’s research regarding when an enforceable legal claim is established. That term comes from existing guidance that applies to imposed nonexchange transactions—primarily property taxes. The research surveyed state statutes that address when levies, liens, and assessments are established. The Board tentatively agreed that the Invitation to Comment should describe the diversity in statutory provisions and practice. Modifications to the existing nonexchange literature, however, will not be proposed and no questions will be presented. The discussion will indicate that the Board is expected to address this issue in a future due process document as part of this project.

Minutes of Meetings, May 23–25, 2017

The Board tentatively decided that the obligation for expense notion should be further developed within the earnings-based approach for expense recognition of exchange transactions in the Invitation to Comment.

The Board reviewed a narrative discussion and illustrative graphic of the exchange/nonexchange model to be presented in the Invitation to Comment. The Board tentatively decided that both the narrative discussion and illustration depict the tentative decisions made thus far in the development of the exchange/nonexchange model.

The Board also reviewed proposed examples to be presented in the Invitation to Comment that illustrate recognition issues for the performance obligation/no performance obligation model and performance obligation approach (items 1–4 below); for the exchange/nonexchange model (items 5 and 6); and for both models (items 7 and 8).
  1. The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with identifying a performance obligation.
  2. The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with the notion of a group in the definition of a performance obligation.
  3. The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with determining when a performance obligation is satisfied.
  4. The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with expense recognition using a performance obligation.
  5. The Board tentatively decided that the proposed example sufficiently demonstrates the issues associated with classifying a transaction as exchange or nonexchange.
  6. The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with determining when an entity is entitled to revenue or obligated for expense.
  7. The Board tentatively decided that the proposed examples sufficiently demonstrate the issues associated with endowment pledges and beneficial interests in perpetual trusts.
  8. The Board tentatively decided that proposed example sufficiently demonstrates the issues associated with contingencies.
Minutes of Meetings, April 12–14, 2017

The Board continued to discuss issues related to the performance obligation/no-performance obligation model to be presented in the Invitation to Comment (ITC). The Board tentatively decided that the ITC should present two alternatives for the definition of a performance obligation: the first including the notion of “groups of individuals” as resource providers or resource recipients and the second excluding the notion of “groups of individuals.”

The Board next discussed issues related to revenue recognition of endowment pledges and beneficial interests in perpetual trusts. The Board tentatively decided that the time requirement to recognize assets and revenue associated with endowment pledges and beneficial interests in perpetual trusts is not consistent with the conceptual framework. The Board tentatively decided that the ITC should identify these potential issues as items that will require resolution at a later stage of the project but not present potential modifications.

The Board also discussed alternatives for the ongoing development of an earnings-based approach for the recognition of exchange revenues. The Board tentatively decided to develop an earnings-based alternative concentrating on revenue recognition as it relates to when the government is entitled to the benefits represented by the revenue from the transaction.

The Board then discussed issues related to expense recognition for nonexchange transactions. The Board tentatively decided that the ITC should indicate that potential guidance for governmental entities that provide resources through imposed nonexchange transactions and derived tax transactions will be considered at a later stage of the project. The Board tentatively decided that recognition of expenses from government-mandated and voluntary nonexchange transactions when eligibility requirements are satisfied is consistent with the conceptual framework and that the ITC should not present potential modifications to the general guidance regarding eligibility.

The Board tentatively decided that the expense recognition based on satisfaction of the eligibility requirements—a required characteristic of recipient, a time requirement, and a reimbursement requirement—is consistent with the conceptual framework and that the ITC should not present potential modifications to these requirements. The Board also tentatively decided that the liability recognition requirement that a transaction have a time requirement is consistent with the conceptual framework, and there should not be potential modifications presented in the ITC. The Board tentatively decided that satisfaction of the contingency eligibility requirement for expense recognition is consistent with the conceptual framework. The Board tentatively decided that the ITC should indicate that potential modifications regarding the application of the contingency requirement will be considered at a later stage in the project.

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 Archive

Revenue and Expense Recognition—TENTATIVE BOARD DECISIONS TO DATE


During initial deliberations, the Board tentatively agreed to present in an Invitation to Comment that:
  • The scope of this project will be defined on an exclusionary basis. Topics to be initially excluded from the scope will include the following:
    • Topics that were developed considering the current conceptual framework;
    • Topics related to financial transactions, such as investments, derivatives, leases, and insurance.
    • Topics related to transactions arising from the recognition of capital assets or certain liabilities.
  • 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 measurement proposals will focus on developing a comprehensive revenue and expense recognition model based on the economic resource measurement focus.
  • The development of revenue and expense measurement proposals for the governmental funds will be considered after the Board proposes a specific measurement focus for governmental funds in the financial reporting model reexamination project.
Tentative positions to be presented in the Invitation to Comment:
  • There are two comprehensive models of revenue and expense recognition: (1) a performance obligation/no performance obligation model and (2) an exchange/nonexchange model.
  • The performance obligation/no performance obligation model includes the following positions:
    • Revenue and expense from transactions with performance obligation should be recognized as the performance obligation is satisfied.
      • Application issues related to recognition, which could be over time or at a point in time, would be addressed in a subsequent due process document.
    • Revenue and expense from transactions without performance obligations should be recognized based on eligibility requirements articulated in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions.
    • The working definition of a performance obligation will be a promise with another party to provide a distinct good or service, a series of distinct goods or services, or other resource (or a bundle of goods, services, or other resources) in a binding arrangement, in which the beneficiary of the distinct goods or services is a specific individual, entity, or group of individuals (such as a customer, resource provider, vendor, resource recipient, or employee) rather than the general public.
    • Application issues related to this model would be addressed in subsequent due process documents. Such issues include:
      • The term binding promise which could be used to describe the various types of arrangements (for example, contract, agreement, etc.) that may give rise to revenue or expense
      • The term, another party, could be used rather than a specific term (for example, customer)
      • The concepts of distinct goods or services or a series of distinct goods or services and binding agreement
      • The identity of beneficiaries of goods and services
      • The impact of transactions with purpose restrictions
  • The issue of “groups of individuals” as resource providers or resource recipients.
  • The right of refund is a contingency and is applicable to both goods and services.
  • In the earnings recognition approach, consideration of the refund period is removed and the right of refund is reported as a contingency.
  • An unsatisfied performance obligation meets neither the definition of an asset nor the definition of a liability.
  • The exchange/nonexchange model includes the following positions:
    • Revenue and expense from exchange transactions would be recognized based on the earnings approach.
    • Revenue and expense from nonexchange transactions would be recognized based on eligibility requirements articulated in Statement 33.
    • The current definition of exchange, nonexchange and exchange-like would be included in the Invitation to Comment, without modifications.
    • The earnings-based approach would be used for recognition of exchange transactions. The development of an earnings-based approach for recognition of revenue from exchange transactions would focus on the point in time when the government is entitled to the benefits represented by the revenue from the transaction. The development of an earnings-based approach for recognition of expense from exchange transactions would focus on the point in time when the government is obligated for the expense.
  • 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.
  • 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 guidance regarding eligibility will not be presented in the Invitation to Comment.
  • For assets and revenues associated with endowment pledges and beneficial interests in perpetual trusts, current recognition guidance is not consistent with the conceptual framework. The Invitation to Comment will indicate that potential modifications will be considered in later stages of the project.
  • Potential guidance for governmental entities that provide resources through imposed nonexchange transactions and derived tax transactions could be considered in a later stage of the project.
  • The recognition of expenses as eligibility requirements are satisfied for government-mandated and voluntary nonexchange transactions is consistent with the conceptual framework, and the Invitation to Comment should not present potential modifications to the general guidance regarding eligibility. The recognition of expenses by a provider government when the eligibility requirements of required characteristics of recipient, time requirements, and reimbursement requirement are met is consistent with the conceptual framework. The Invitation to Comment will not present potential modifications to any of those requirements.
  • For voluntary nonexchange transactions, the barrier to expense recognition by a provider government requires that, if applicable, a contingency requirement to be met. This is consistent with the conceptual framework. Potential modifications regarding the application of this requirement could be considered in a later stage of the project.
  • For imposed nonexchange transactions—frequently involving property taxes—an asset is recognized when there is an enforceable legal claim. Currently, there is diversity in statutory provisions and practice, and this practice issue would be considered in a later stage of the project.
  • For a performance obligation—there is a relationship between the rights and obligations in a binding arrangement.