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

Statements 33 and 36 were issued in the 1990s, prior to the completion of key parts of the conceptual framework through the issuance of Concepts Statement No. 4, Elements of Financial Statements, in 2007. Concepts Statement 4 includes the definition of two additional elements in financial statements, deferred inflows and deferred outflows of resources. Therefore, an evaluation of the recognition of nonexchange transactions against the conceptual framework would be necessary.

Accounting and Financial Reporting Issues: The project is addressing the following issues:
  1. Specific guidance for exchange transactions is limited and current guidance indicates revenue from exchange transactions should be recognized when the exchange takes place. Differences in practice have emerged as to whether the exchange takes place when the sale occurs or when the obligation is fulfilled. Should revenue be recognized at the time of sale or when (or as) the obligation is fulfilled?
  2. FASB guidance introduced a performance obligation approach to recognition of revenue. Should the performance obligation approach be used for transactions of a government? Should the approach be used only for exchange transactions? Should the approach be used for both revenue and expenses?
  3. Statements 33 and 36 were issued prior to additional development of the GASB Concepts Statements. Should the guidance be revised in light of the Concepts Statements?
  4. GASB literature contains guidance for certain exchange expenses, such as compensated absences and postemployment benefits. Guidance does not exist for most other common exchange expenses, including salaries and circumstances in which the government is the customer. Should guidance be developed for these exchange expenses?
Project History:
  • Pre-agenda research approved: September 2015
  • Added to current technical agenda: April 2016
  • Task force established? Yes
  • Deliberations began: May 2016
  • Task force meeting held: August 2017
  • Invitation to Comment issued: January 2018
  • Comment period: January–April 2018
  • Public hearings held: May 2018
  • Redeliberations began: June 2018
  • Task force meeting held: May 2019
Current Developments: Since April 2019, the Board has deliberated and tentatively agreed to propose a new categorization methodology for revenue and expense transactions. Category A transactions contain performance obligations and Category B transactions do not contain performance obligations. The Board also began deliberations regarding measurement issues.

Work Plan:
 
Board Meetings Topics to Be Considered
October 2019: Continue discussion of measurement issues and discuss recognition issues on a conceptual basis.
November 2019: Discuss Category A recognition principles and application.
January 2020: Discuss Category B recognition principles and application.
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–November 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, October 15–17, 2019

The Board began deliberations by discussing the recognition component of the revenue and expense recognition model. The Board reviewed transactions in both Category A and Category B to identify when an increase in net assets, and therefore recognition of the receivable, should occur.
 
Asset recognition in Category A revenue transactions was discussed first by the Board. The Board tentatively decided that assets should be proposed to be recognized when the government has a right to receive by performing either an action (transfer of goods or services) or a forbearance associated with an obligation, or when resources are received prior to performance. The Board also tentatively decided that guidance should not be proposed on the issue of distinguishing between contract assets and receivables, nor should guidance be proposed regarding the recognition of an asset solely based on the payment terms of the binding arrangement. For expenditure-driven grants, the Board tentatively decided to propose that a receivable be recognized when the government has incurred allowable costs pursuant to all applicable compliance requirements established by an executed grant agreement, and no additional consideration be given to the grantor’s resource appropriation.
 
The Board then deliberated asset recognition in Category B revenue transactions. The Board tentatively agreed generally that asset recognition provisions in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, should be proposed to be retained for derived Category B revenues, based on the existence of a legally enforceable claim, with an expanded rationale for the existence of an asset. That is, assets should be proposed to be recognized for derived Category B revenues when the underlying transaction or activity on which the tax or fee is imposed occurs or when the resources are received, whichever occurs first. The Board tentatively decided that the derived tax revenues subcategory should be proposed to be modified as derived Category B revenues to incorporate capital fees.
 
The Board tentatively agreed to propose that asset recognition provisions in Statement 33 be retained for imposed Category B revenues and to expand the rationale for the asset recognition of those transactions. However, the issue of when certain imposed Category B revenues should be recognized (lien date or levy date) will be discussed at a future meeting. In addition, the Board tentatively decided to propose that regulatory fees be considered imposed Category B revenue transactions. The Board also tentatively decided that an asset should be recognized for imposed Category B revenues when the individual or entity engages in, or applies for a permit to engage in, the activity upon which the government has imposed a fee.
 
Deliberations then focused on the four types of eligibility requirements in Statement 33. The Board tentatively decided that required characteristics of recipients should not be considered for the proposed recognition guidance. Furthermore, the Board tentatively agreed that time requirements should not be proposed as asset recognition criteria but should be considered at a later date. Reimbursements, the third type of eligibility requirement, are not applicable to Category B transactions, as expenditure-driven grants have been tentatively identified as Category A transactions. The Board tentatively decided to retain contingencies, the fourth type of eligibility requirement, as a recognition criterion for voluntary Category B revenue transactions.
 
For government-mandated Category B revenue transactions, the Board tentatively agreed to propose that asset recognition occur when the resource provider has appropriated the resources and the corresponding fiscal period has begun. Additionally, the Board tentatively decided to propose that asset recognition for voluntary Category B revenue transactions occur either when the government receives the resources or when a promise is made that is verifiable, measurable, and probable of collection, whichever occurs first; a promise that is probable of collection should have to comply with any pre-established conditions.
 
Next, the Board deliberated recognition for right of return and of liabilities in revenue transactions. The Board tentatively decided to propose guidance for the right of return applicable to both goods and services and that this event be referred to as right of refund. In addition, the Board tentatively agreed that right of refund should be treated in a different manner than the concepts of contravention of purpose restrictions or grant compliance requirements and should not be considered in the proposed categorization step of the model. Furthermore, the Board tentatively decided to propose that right of refund be accounted for as a contingent liability for Category A revenue and should not impact the timing of revenue recognition.
 
Deliberations then moved to whether an increase in net assets should involve recognition of a liability in revenue transactions. Category A revenues were discussed first. The Board tentatively decided that a liability should not be recognized in a wholly unperformed binding arrangement; that is, the Board tentatively agreed to propose that a performance obligation is not always a present obligation. In addition, the Board tentatively agreed that a liability should be recognized for resources received by the government prior to satisfying its performance obligation in a binding arrangement and for refundable and nonrefundable advances provided prior to the government’s entitlement to the resources. The Board tentatively agreed not to propose guidance to identify contract assets and contract liabilities in this project because both items are display issues. For Category A revenue transactions, the Board tentatively agreed not to propose guidance that permits the netting of assets and liabilities in Category A binding arrangements for transactions and other events in the scope of this project. Additionally, the Board concluded that guidance related to agency relationships is provided in Statement No. 84, Fiduciary Activities, and, therefore, should not be considered within the scope of this project. Consequently, the Board tentatively agreed not to propose permitting the netting of revenues and expenses.
 
Next, the Board discussed liability recognition in Category B revenue transactions. The Board tentatively decided to propose that liability recognition provisions in Statement 33 be retained for resources provided in advance for derived Category B revenue transactions, with expanded rationale for the existence of a liability. That is, a liability should be recognized in derived Category B revenue transactions when resources are provided to a government before the underlying transaction occurs, which is the point when the government is entitled and has a legally enforceable claim to them. For imposed Category B revenues, the Board also tentatively agreed to propose that recognition provisions in Statement 33 be expanded to address recognition of advances as liabilities for resources received before the date on which the government imposes the tax or fee and has a legally enforceable claim to them.
 
Furthermore, the Board tentatively decided to propose that a liability be recognized for assets received as advances in voluntary Category B revenue transactions. For government-mandated and voluntary Category B revenue transactions, the Board tentatively decided to propose that a liability not be recognized for purpose restrictions placed on assets received to which the government already has established a legally enforceable claim; that is, assets recognized by the government as a receivable that are purpose-restricted should not be recognized as a liability. Additionally, the Board tentatively agreed to propose that the provisions in Statement 33 be modified to acknowledge the existence of unrestricted government-mandated revenue transactions. The Board also tentatively decided to propose that a liability not be recognized for assets that have time requirements (after a legally enforceable claim to the resources has been raised). Regarding advances, the Board also tentatively decided that a definition should be developed and proposed that describes the circumstance in which a government receives resources before it has a legally enforceable claim, with the intent to clarify that those resources should always be recognized as liabilities.
 
Finally, the Board discussed recognition unit of account, which informs the level of aggregation or disaggregation at which rights and obligations would be identified for Category A recognition. The Board tentatively decided to propose that the recognition unit of account in Category A binding arrangements be a performance obligation.

Minutes of Meetings, August 27–28, 2019
 
The Board began deliberations by evaluating the application of the categorization component of the proposed model to three revenue and expense transactions. The Board discussed observations on the categorization of various government-mandated transactions and requested additional research. The Board tentatively decided that payment in lieu of taxes (PILOT) programs generally should be identified as Category B transactions, although each PILOT program should be assessed independently because certain PILOT programs can be more representational of a fee-for-service-type arrangement. The Board also tentatively agreed that escheat revenues should be identified as Category B transactions.
 
The Board then discussed moral and constructive obligations and their relationship to the categorization component of a revenue and expense recognition model. The Board tentatively decided that both the rebuttable presumption of enforceability and recourse available for enforceability mechanisms beyond a court of law allow sufficient flexibility to include moral and constructive obligations within the scope of the project, such that the current model proposal does not require modification to encompass these transactions.
 
Finally, the Board deliberated the level at which the categorization component of the model should be applied. The Board tentatively agreed that the categorization assessment should be made at the binding arrangement level, except for circumstances in which there is potential for multiple transactions within the binding arrangement to be assessed in different categories. In addition, the Board tentatively decided that categorization should be reassessed only when the terms and conditions of a binding arrangement have significantly changed. The Board also tentatively agreed that categorization may be applied to a portfolio of binding arrangements with similar characteristics, if a government reasonably expects that the effects of the portfolio assessment would not differ from those of the categorization application to the individual binding arrangements.

Minutes of Meetings, July 16–18, 2019
 
The Board began deliberations by further defining concepts in the categorization component of the revenue and expense recognition model. The Board tentatively decided not to include the characteristic of voluntary in the proposed categorization methodology. Additionally, the Board tentatively agreed not to include collectibility or the type of remedy available for the breach of an agreement proposal in the categorization component of the model. In addition, the Board tentatively agreed to rely on the general terms government and counterparty in the proposal to identify parties to a transaction, rather than developing terms to specifically identify parties to transactions.
 
The Board tentatively decided that forbearance, as an obligation to perform, should be proposed to be described as a promise to forgo exercising a right in exchange for consideration, such that a dependent relationship exists between the forbearance and the consideration, and remedies exist in the case of breach.

The Board also tentatively decided that economic substance should be proposed to be described as an expected change in the risk, amount, or timing of the government’s cash flows or an impact on the government’s service potential. To describe arrangements in the scope of this project, the Board tentatively agreed to retain the term binding arrangement in the proposal and not rely on the term valid.

The proposed structure for the categorization component of the model was tentatively agreed to by the Board as having four operable steps: identification of a binding arrangement, mutual assent between the parties of capacity, identification of the parties’ substantive rights and obligations, and interdependency between those rights and obligations.
 
Next, the Board discussed an application of the proposed categorization component to a variety of revenue and expense transactions. The Board tentatively agreed that the following transactions should be identified as Category A: eligibility-driven grants, research grants, revolving loans, Medicaid fee-for-service programs, fees for specific services, labor costs, and purchase orders and contracts; and the following transactions should be identified as Category B: taxes, special assessments, regulatory fees, punitive fees, donations, purpose-restricted grants, Medicaid supplementary payments, capital fees, and individual assistance.
 
The Board then reviewed various topics to be included in the measurement component of the proposed model. The Board tentatively agreed to a base measurement proposal wherein revenues and expenses are measured indirectly through the more liquid item, such as cash, payables, and receivables.
 
The Board tentatively decided to remove from the scope of the project all capital asset transactions, including purchases, sales, donations, and nonmonetary exchanges of capital assets. Additionally, the Board tentatively agreed to remove guidance for in-kind contributions, contributed services, and nonmonetary interlocal agreements (or services for services) from the scope of the project.  Those topics will be considered in potential future projects of the Board.
 
Finally, the Board deliberated the topics of contract incentives and collectibility within the measurement component of the revenue and expense recognition model. The Board tentatively decided to propose defining contract incentives in the same manner as lease incentives and to measure variable or contingent contract incentives in the same manner as other variable or contingent consideration, for which measurement will be discussed at a subsequent meeting. From the perspectives of either a government recognizing revenue or incurring expense in a transaction as a whole, the Board tentatively agreed to propose that fixed (or fixed in substance) contract incentives be included in the transaction amount. Regarding the topic of collectibility, the Board tentatively decided to propose that existing collectibility guidance in Statements No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which requires revenue to be recorded net of estimated uncollectible amounts, be carried forward for both Category A and Category B transactions. The Board also tentatively concluded that collectibility guidance similar to the Financial Accounting Standards Board guidance on current expected credit losses should not be developed in this project.

Minutes of Meetings, June 5–6, 2019
 
The Board began deliberations by reviewing feedback provided at the May meeting of the Revenue and Expense Recognition Task Force. The Board discussed feedback from task force members related to the project objective and scope, the ITC models, the proposed AB Model, interperiod equity and deferred inflows and outflows of resources, and stakeholder communications.
 
Next, the Board discussed the continued development of the categorization component of the proposed AB Model. The Board tentatively decided to propose that all binding arrangements in the scope of the project be valid by meeting two requirements. To be valid, a binding arrangement should (a) contain a rebuttable presumption of enforceability and (b) have economic substance. In addition, the Board tentatively decided to propose that Category A binding arrangements be further evidenced by mutual assent to the transaction between the parties of the transaction and a requirement that the parties can identify their rights and obligations, which are substantive. The Board tentatively decided to propose that Category A transactions be required to have rights and obligations that are interrelated in such a manner that each is dependent on the existence of the other. Additionally, a remedy should exist for circumstances in which either party fails to meet the terms of the binding arrangement. That proposed requirement would clarify the previously used phrase “rights and obligations that articulate in equivalent terms.”
 
The Board tentatively agreed to propose that Category B binding arrangements are those that meet the requirements for validity but fail to meet any of the additional Category A characteristics.
 
The Board continued deliberations by further refining the proposed characteristic of rights and obligations in Category A transactions.

Minutes of Task Force Meeting, May 15, 2019
 
The task force provided feedback on the topics that the Board is considering for the development of a revenue and expense recognition model. The task force first discussed the project objectives and scope. Some task force members suggested improving stakeholder communications by more clearly explaining the project objectives, the scope exclusions, and the reasoning for those exclusions.

The task force then discussed the three models in the Invitation to Comment, Revenue and Expense Recognition: (1) the exchange/nonexchange model, (2) the performance obligation/no performance obligation model, and (3) the hybrid model. Some task force members expressed agreement that a comprehensive model would provide clearer recognition guidance. Some members suggested clarifying what inconsistencies exist in the current guidance. Still others raised concerns about value and the challenges associated with communicating the subjectivity of that topic.

Next, the task force members discussed the proposed AB Model and the five model assumptions. Some members provided suggestions on how to improve the model assumptions.

The task force members discussed the basic concepts proposed for the AB Model, such as the classification of Category A transactions as those having an acquisition coupled with a sacrifice. Some task force members agreed with the basic concepts and recommended clarification in various aspects of the model. Some task force members agreed that the amount of consideration in a transaction would be assessed as a measurement issue, rather than a categorization concept. In addition, some task force members recognized that challenges would arise for transactions that are near the boundaries between categorization of Category A transactions and Category B transactions.

The task force discussed the concepts of interperiod equity and deferred inflows and outflows as they relate to a revenue and expense recognition model. Some task force members offered suggestions about education initiatives to communicate those concepts to stakeholders.

Finally, the task force members discussed stakeholder communications related to the ongoing project. Suggestions were offered about topics to address as well as format.

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 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 proposals related to categorization:
  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 should 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; that is, the rights and obligations are dependent on the existence of each other, such that there is a remedy for failure of either party to meet the terms of the arrangement. 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 should 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 provide resources. The right would represent the ability to receive or collect resources. Binding arrangements associated with Category B transactions include enabling legislation and purpose-restricted grants.
    3. To refine these descriptions, the Board should rely on two characteristics identified in the exploratory work: (1) the binding arrangement and (2) rights and obligations that articulate in equivalent terms.
      1. The binding arrangement should:
        1. Have a rebuttable presumption of enforceability
        2. Have economic substance.
    4. Category A binding arrangements should include:
      1. Mutual assent between the parties of capacity in the transaction
      2. Identification of rights and obligations, which are substantive, by the parties to the transaction
      3. Dependency of the rights and obligations in the binding arrangement on the existence of each other.
    5. Category B binding arrangements should be identified as those that fail any of the Category A characteristics.
    6. The terms government and counterparty should be used to describe parties to a transaction, rather than developing terms for specific identification of the parties.
    7. Forbearance, as an obligation to perform, should be described as a promise to forgo exercising a right in exchange for consideration, such that a dependent relationship exists between the forbearance and the consideration, and remedies exist in the case of breach.
    8. The term binding arrangement should be retained to describe arrangements in the scope of this project.
    9. Economic substance should be described as an expected change in the risk, amount, or timing of the government’s cash flows or an impact on the government’s service potential.
    10. The rebuttable presumption of enforceability and recourse available beyond a court of law allow for moral and constructive obligations to be within the scope of the project.
  2. The structure of the categorization component of the model should be proposed as having the following four steps:
    1. Identification of a binding arrangement, as evidenced by both a rebuttable presumption of enforceability and economic substance, in order for the binding arrangement to be in the scope of the project
    2. Mutual assent between the parties of capacity, as evidenced by mutual approval of the terms and conditions of the arrangement between parties that have authority to enter into the transaction on behalf of the government or its counterparty
    3. Identification of the parties’ substantive rights and obligations, which are in the form of a right to consideration or an obligation to perform, including action or inaction (forbearance), and are identifiable for both the government and the counterparty to the transaction
    4. Interdependency between those rights and obligations, such that the obligations are dependent on the rights, the rights are dependent on the obligations, and a remedy exists in case of noncompliance by one of the parties.
  3. The following transactions should be identified as Category A transactions:
    1. Fees for specific services, such as water fees, tuition fees, transit fares, and lottery tickets
    2. Eligibility-driven grants
    3. Research grants
    4. Revolving loans
    5. Medicaid fee-for-service programs
    6. Labor costs
    7. Purchase orders and contracts
  4. The following transactions should be identified as Category B transactions:
    1. Taxes
    2. Special assessments
    3. Regulatory fees, such as professional licenses, building permits, or drivers’ licenses
    4. Punitive fees, such as fines, penalties, and forfeitures
    5. Donations
    6. Purpose-restricted grants
    7. Medicaid supplementary payments
    8. Capital fees, such as passenger facility charges, developer fees, or wastewater impact fees
    9. Individual assistance.
    10. Payment in lieu of taxes (PILOT) programs, in general (each program should be independently assessed to ensure proper categorization)
    11. Escheat revenues.
  5. The categorization assessment should be applied at the binding arrangement level, except for circumstances in which there is potential for multiple transactions in the binding arrangement to be categorized in different categories.
  6. Categorization should be reassessed when the terms and conditions of a binding arrangement have changed significantly.
  7. Categorization may be applied to a portfolio of binding arrangements with similar characteristics, if a government reasonably expects that the effects of the portfolio assessment would not differ from those of the categorization application to the individual binding arrangements.
  8. Right of refund should not be considered in the categorization assessment.
  9. To move away from the following characteristics identified during the exploratory work. The Board tentatively agreed not to rely on:
    1. Service relatable or distinct goods or services in any categorization definition
    2. Specific beneficiary in any categorization definition
    3. The characteristic of cost recovery as a distinguishing characteristic of revenue and expense transactions
    4. The characteristic of benefit as a distinguishing characteristic of revenue and expense transactions
    5. Value to develop categorization definitions
    6. Consideration as a means to categorize revenue and expense transactions.
    7. The characteristic of voluntary in the categorization component of the model
    8. Collectibility in the categorization component of the model
    9. The type of remedy available for a breach of an agreement in the categorization component of the model.
  10. The earnings recognition approach should no longer be considered in this project.
The Board tentatively agreed to the following model development proposals related to recognition:
  1. Revenue recognition is broadly comprised of the following four steps:
    1.  First, identify whether there is an increase in assets (increase in net assets
    2. Second, identify whether the assets meet the definition of a liability
    3. Third, identify whether the assets meet the definition of a deferred inflow of resources
    4. Fourth, recognize revenue.
  2. Expense recognition is comprised of the following four steps:
    1. First, identify whether there is an incurrence of a liability (decrease in net assets)
    2. Second, identify whether the liability meets the definition of an asset
    3. Third, identify whether the asset meets the definition of a deferred outflow of resources
    4. Fourth, recognize expense.
  3. With this hierarchy:
    1. A definition for advances should be developed to describe the circumstance in which a government receives resources before a government has a legally enforceable claim in both revenue categories, with the intent to clarify that those resources should always be recognized as liabilities.
    2. Guidance permitting netting of assets and liabilities for transactions and events in the scope of this project should not be permitted.
    3. Guidance permitting netting of revenues and expenses for transactions and events in the scope of this project should not be permitted.
    4. The recognition unit of account in Category A binding arrangements should be a performance obligation for both revenues and expenses.
    5. Eligibility requirements, as provided in paragraph 20 of Statement 33, should be adjusted to reflect the needs of Category B transactions as follows:
      1. Required characteristics of recipients should not be considered for any recognition guidance.
      2. Time requirements
        1. Should be retained to address recognition of deferrals and revenue and expense
        2. Should not be considered in asset recognition
        3. Do not impose a present obligation and, therefore, are not liabilities.
      3. Reimbursement requirements are not applicable to Category B transactions, as all expenditure-driven grants have been tentatively identified as Category A transactions.
      4. Contingencies are retained to address recognition of voluntary Category B revenues.
  4. Category A revenue recognition:
    1. Assets should be recognized when the government has a right to receive by performing an obligation through either action (transfer of goods or services) or forbearance, or when resources are received prior to performance.
    2. Assets should not be recognized solely based on the payment terms of the binding arrangement.
    3. For expenditure-driven grants, a receivable should be recognized when the government has incurred allowable costs pursuant to all applicable compliance requirements established by an executed grant agreement.
    4. A liability should not be recognized in a wholly unperformed binding arrangement; that is, a performance obligation is not a present obligation.
    5. A liability should be recognized for resources received by the government prior to satisfying its performance obligation (advances) in a binding arrangement. Those resource represent a present obligation to perform or are refundable.
      1. Nonrefundable advances are also liabilities.
  5. Category B revenue recognition:
    1. Subcategories identified in Statement 33 should be retained for recognition purposes of Category B transactions.
      1. Asset recognition provisions in Statement 33 generally should be retained; that is, based on the existence of a legally enforceable claim, with an expanded rationale for the existence of an asset.
    2. Derived Category B revenue
      1. Assets should be recognized for derived Category B revenues when the underlying transaction or activity on which the tax or fee is imposed occurs or when the resources are received, whichever occurs first.
      2. Capital fees such as passenger facility charges and impact fees have been tentatively identified as derived Category B transactions.
      3. Resources received before the underlying transaction occurring should be recognized as liabilities.
    3. Imposed Category B revenue
      1. Asset recognition for imposed Category B revenues should occur when the individual or entity engages in, or applies for a permit to engage in, the activity upon which the government has imposed a fee.
      2. Regulatory fees and special assessments should be considered imposed Category B revenue transactions.
      3. Resources received before the government has a legally enforceable claim should be recognized as a liability.
    4. Voluntary Category B revenue
      1. Asset recognition for voluntary Category B revenue transactions should occur either when the government receives the resources or when a promise is made that is verifiable, measurable, and probable of collection, whichever occurs first. A promise that is probable of collection should have to comply with any pre-established conditions.
        1. Pledges should be recognized as assets whether pledged to an endowment or for other purposes.
      2. A liability should be recognized for assets received as advances in voluntary Category B revenue transactions, which infrequently occurs in certain PILOT programs when a not-for-profit provides resources to a government before a binding arrangement is established.
    5. Government mandated Category B revenue
      1. Asset recognition for government-mandated Category B revenue transactions should occur when the resource provider has appropriated the resources and the corresponding fiscal period has begun. 
      2. A liability should not be recognized in government-mandated and voluntary Category B revenue transactions for purpose restrictions placed on assets received to which the government already has established a legally enforceable claim
      3. The provisions in Statement 33 should be modified to acknowledge the existence of unrestricted government-mandated revenue transactions.
The Board tentatively agreed to the following model development proposals related to measurement:
  1. For transactions in which there is a liquid resource, a formalization of current measurement guidance should be followed wherein revenues and expenses are measured indirectly through the more liquid item, such as cash, payables, and receivables.
  2. Contract incentives should be defined in the same manner as lease incentives.
  3. Variable or contingent contract incentives should be measured in the same manner as other variable or contingent consideration, which are topics to be discussed at a subsequent meeting.
  4. From the perspective of a government recognizing revenue in a transaction, fixed (or fixed in substance) contract incentives should be included in the transaction amount.
  5. From the perspective of a government incurring expense in a transaction, fixed (or fixed in substance) contract incentives should be included in the transaction amount.
  6. A “probable of collection” threshold for revenue recognition should be considered implicit in the definition of a binding arrangement.
  7. Existing collectibility guidance in Statements 33 and 62 should be carried forward, which requires revenue to be recognized net of estimated uncollectible amounts, for both Category A and Category B transactions.
  8. Collectibility guidance similar to the Financial Accounting Standards Board’s current expected credit losses guidance should not be developed in this project.
  9. Right of refund (applicable to both goods and services) is a measurement issue and should not impact the timing of revenue recognition, nor would it impact contravention of purpose restrictions or grant compliance requirements.
    1. Right of refund should be recognized as a liability following existent contingency guidance.
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 capital asset transactions, including purchases, sales, donations, and nonmonetary exchanges of capital assets, as well as 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 should 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. Broadcasters, paragraphs 385–388
    4. Cable Television Systems, paragraphs 389–399
Additionally, topics related to measurement such as collectibility, right of return, and warranties should be included in the scope of the project, as well as topics for which limited guidance exists, such as expense recognition, 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
  4. Statement No. 84, Fiduciary Activities: Topics related to agency relations.
Finally, topics related to in-kind contributions, contributed services, and nonmonetary interlocal agreements (or services for services) are outside the scope of the project. Topics related to display (such as operating or nonoperating classifications), distinguishing between contract assets and receivables or identifying contract liabilities, or disclosure for revenues or expenses also are outside the scope of the project.

Expense Model Conclusions

The Board tentatively agreed to the following expense model proposals:
  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.