Project Pages

Conceptual Framework: Recognition

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

Status:
Exposure Draft Redeliberations

Conceptual Framework: Recognition—Project Plan
 

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

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

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

Work Plan:
 
Board Meetings Topics to Be Considered
September 2021: Redeliberate issues related to the short-term approach.
November 2021: Redeliberate issues related to the economic-resources measurement focus and accrual basis of accounting.
December 2021: Redeliberate issues related to the hierarchy of recognition.
January 2023: Discuss draft of final concepts.
February 2023: Discuss preballot draft of a final Concepts Statement.
April 2023: Discuss ballot draft of a final Concepts Statement and consider for approval.

Conceptual Framework: Recognition—Recent Minutes


Minutes of Meetings, August 10–12, 2021

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

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

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

Minutes of Meetings, June 30–July 2, 2021

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

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

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

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

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

Minutes of Meetings, May 20–21, 2021

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

Minutes Archive

Conceptual Framework: Recognition—Tentative Board Decisions to Date


The Board tentatively decided the following:
  • A measurement focus and basis of accounting that has a short-term perspective should be retained.
  • The recognition terms for the short-term financial resources measurement focus and accrual basis of accounting (short-term method) should be the terms of the binding arrangement (or estimated payments if there is no binding arrangement or the binding arrangement does not include specific payment terms).
  • The recognition method for long-term transactions and events in the short-term method should be based on the inception date of the transaction (Transactions and other events for which the period from inception to conclusion is greater than the recognition period should be recognized when payments are due).
  • The recognition period of the short-term method should be one year.