Revenue and Expense Recognition

Project Description: The overall objective of this project is to develop a comprehensive, principles-based model that would establish categorization, recognition, and measurement guidance applicable to a wide range of revenue and expense transactions. Achieving that objective will include: (1) development of guidance applicable to topics for which existing guidance is limited, (2) improvement of existing guidance that has been identified as challenging to apply, (3) consideration of a performance obligation approach to the GASB’s authoritative literature, and (4) assessment of existing and proposed guidance based on the conceptual framework. The expected outcome of the project is enhanced quality of information that users rely upon in making decisions and assessing accountability.

Status:
Preliminary Views Redeliberations

• Background
• Accounting and Financial Reporting Issues
• Project History
• Current Developments
• Work Plan
• Recent Minutes
• Minutes Archive
• Tentative Board Decisions
• Task Force
• Project staff:
  • Paulina Haro
  • Pam Dolan
  • Ryan McDonough
  • Danielle Pollock
  • Ainsley MacIsaac
  • Emma Blessinger
  • Jasmine Sodhi

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?

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
• Preliminary Views approved: June 2020
• Comment period: July 2020–February 2021
• Public hearings and user forums held: March and April 2021
• Redeliberations began: May 2021

Current Developments: At the May 2023 meetings, the Board discussed the recognition methodology which includes an anchored element hierarchy. In addition, the Board discussed definitions for transaction and different types of unit of account. At the August 2023 meeting, the Board discussed issues related to time requirements, purpose restrictions and the role of eligibility requirements.

Work Plan:
 

Board Meetings	Topics to Be Considered
October/November 2023	Redeliberate recognition issues related to eligibility requirements.
December 2023	Redeliberate recognition issues related to other Category B transactions.
January 2024	Develop a measurement strategy. Measurement: fixed and variable consideration, monetary and nonmonetary components.
March 2024	Measurement: significant financing component, incentives, advances, discounts, prices concessions.
April 2024	Measurement: collectibility and right of return.
May 2024	Measurement allocation.
July 2024	Cases; Task Force meeting.
September/October 2024	Effective date and transition provisions; review a first draft of a standards section of an Exposure Draft; cost-benefit considerations.
November 2024	Review revised draft of a standards section and first draft of a Basis for Conclusions.
February 2025	Review a preballot draft of an Exposure Draft.
March 2025	Review a ballot draft of an Exposure Draft and consider for approval.
April–June 2025	Comment period; public hearings and user forums.
July 2025– March 2027	Redeliberations based on stakeholder feedback.
May 2027	Review a pre-ballot draft of a final Statement.
June 2027	Review a ballot draft of a final Statement and consider for approval.

Revenue and Expense Recognition—RECENT MINUTES

Minutes of Meetings, August 9–10, 2023

The Board began by considering an overview of the recognition attributes tentatively agreed upon in this project.

Then, the Board continued redeliberations of time requirements and tentatively decided that time requirements should be retained as a recognition attribute that establishes the recognition of deferred inflows and deferred outflows of resources.

The Board also deliberated the circumstances that should be considered time requirements. The Board tentatively agreed that time requirements should be identified as circumstances that represent temporary limitations to use, not permanent constraints. The Board also tentatively decided that appropriations of the resource provider should not be considered time requirements. Lastly, the Board tentatively agreed that contract terms, and specifically grant performance periods, should not be identified as time requirements.

Next, the Board discussed which party in a transaction can impose time requirements and tentatively decided that time requirements should be limited to circumstances in which the government’s counterparty or enabling legislation stipulates limitations about when resource usage may begin.

The Board then continued redeliberations of purpose restrictions and tentatively decided that purpose restrictions should not be considered a recognition attribute that informs the recognition of the anchoring element for any transaction.

Next, the Board discussed the characteristics of purpose restrictions and tentatively agreed that purpose restrictions can only be imposed by a resource provider or enabling legislation. Additionally, the Board tentatively decided that purpose restrictions can be either broad or narrow. Lastly, purpose restrictions can simultaneously exist with eligibility requirements and time requirements.

Minutes of Meetings, May 16–17, 2023

The Board considered an overview of foundational recognition principles tentatively agreed upon, including the anchored element hierarchy, model assumptions, and terminology definitions.

Next, the Board tentatively agreed that for transactions that require a contractual binding arrangement, element assessment should not begin until an executed binding arrangement is obtained.

The Board then continued redeliberations of a recognition unit of account for Category B transactions. The Board tentatively decided that the recognition unit of account for Category B imposed and derived transactions is the transaction. The Board also tentatively decided that the recognition unit of account for Category B general aid and shared revenue transactions should be identified through the point at which the payments are due.

Minutes of Meetings, April 4–6, 2023

The Board began redeliberations of the categorization methodology by discussing a draft definition of transaction. The Board tentatively decided that a transaction should be defined as “a type of economic activity between the government and at least one counterparty that is evidenced by a binding arrangement.”

Next, the Board continued deliberations of the categorization methodology by discussing unit of account. The Board agreed that the unit of account should represent “the level of aggregation or disaggregation applicable to an item of information to be considered for inclusion in the financial statements through the four communication methods.” Additionally, the Board agreed to retain that definition in internal working documents.

The Board also deliberated definitions of three specific types of units of account relevant in developing guidance in the Revenue and Expense Recognition (RER) project: categorization, recognition, and measurement units of account. The Board tentatively decided that the categorization unit of account should represent “the level of aggregation or disaggregation applicable to an item of information to assess attributes that are relevant in the identification of the scope of specific guidance.”

Next, the Board tentatively decided that the recognition unit of account should represent “the level of aggregation or disaggregation applicable to an item of information to assess whether it meets the definition of an element of financial statements.” The Board then tentatively decided that the measurement unit of account should represent “the level of aggregation or disaggregation applicable to assets and liabilities to assess the relevant measurement attribute applicable to them.”

The Board then continued deliberations of the categorization methodology by discussing the categorization unit of account applicable to the RER project and tentatively decided to modify its prior decision and identify transactions as the categorization unit of account. The Board also tentatively reaffirmed the proposed definition of a binding arrangement included in the Preliminary Views as follows: “an understanding between two or more parties that creates rights, obligations, or both among the parties to a binding arrangement.”

The Board finalized its deliberations of the categorization methodology by reviewing the methodology as a whole, with consideration of the Board’s tentative modifications to the methodology that was proposed in the Preliminary Views document. The Board tentatively decided that revenue and expense transactions in the scope of this project should be categorized based on whether those transactions include a performance obligation.

Minutes of Meetings, February 21–23, 2023

The Board continued redeliberations on the categorization methodology for transactions, as proposed in the Preliminary Views, Revenue and Expense Recognition. The Board considered stakeholder feedback from the Preliminary Views on Steps 3 and 4 of the proposed categorization methodology, identification of substantive rights and obligations, and whether those rights and obligations are interdependent.

First, the Board discussed the impacts that the assessment of substantive rights and obligations has on grant categorization proposals. As a result, the Board tentatively decided to retain the assessment of substantive rights and substantive obligations for all the parties of the binding arrangement as part of the categorization methodology. Additionally, the Board tentatively decided that the rights and obligations that should be considered in the categorization assessment are additional rights that arise from the binding arrangement such that those rights and obligations generally can be expressed as (1) goods and services and (2) consideration. The Board also concluded that the characteristic of substantive denotes importance.

Next, the Board discussed Step 4 of the proposed categorization methodology, the assessment of whether rights and obligations are interdependent. The Board tentatively decided to retain the assessment of interdependence between the rights and obligations of the binding arrangement as part of the categorization methodology.

Finally, as a result of these modifications to the categorization methodology, the Board also tentatively decided to remove the identification of sequential steps in the categorization assessment.

Minutes of Meetings, January 10–11, 2023

The Board continued redeliberations on the categorization methodology proposed in the Preliminary Views, Revenue and Expense Recognition. The Board considered stakeholder feedback from the Preliminary Views on the role of mutual assent and tentatively decided to remove the assessment of mutual assent from the categorization methodology.

Next, the Board continued with a discussion on the role of parties of capacity in the categorization methodology and tentatively decided that parties of capacity should be retained as a characteristic of the rebuttable presumption of enforceability. The Board also tentatively decided to modify Step 1 of the categorization methodology to include the identification of the parties to the transaction.

Minutes of Meetings, November 16–18, 2022

The Board continued redeliberations on the unit of account proposals in the Preliminary Views, Revenue and Expense Recognition. First, the Board discussed stakeholder feedback from the Preliminary Views, requesting an additional explanation of the unit of account and providing direction about the development of proposals for future meetings.

Next, the Board discussed the recognition unit of account proposal in the Preliminary Views and tentatively decided to retain the proposal that the distinct goods or services, which also represent a performance obligation, be the recognition unit of account for Category A revenue and expense transactions in the scope of this project.

Minutes Archive

Revenue and Expense Recognition—TENTATIVE BOARD DECISIONS TO DATE

The Board tentatively decided the following:

• The relevant component part used in the short-term method and the recognition unit of account used in the revenue and expense project are two different accounting notions and should be retained as such.

Scope:

• Scope should be defined as a broad positive statement for recognition and measurement of revenue and expense, with the following three scope exclusion principles:
  • Scope Exclusion Principle 1—not to include guidance related to capital assets and inventory in the scope of the project. As a result, the following pronouncements are outside the scope of the project:
    • Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs
    • Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries
    • Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations
    • Statement No. 51, Accounting and Financial Reporting for Intangible Assets
    • Statement No. 83, Certain Asset Retirement Obligations
    • Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period.
  • Scope Exclusion Principle 2—not to include guidance related to financial instruments in the scope of the project, except for contracts that meet normal purchase and normal sales exceptions as specified in paragraph 14 of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. As a result, the following pronouncements are outside the scope of the project:
    • Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements
    • Statement No. 7, Advance Refundings Resulting in Defeasance of Debt
    • Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues
    • Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities
    • Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions
    • Statement No. 30, Risk Financing Omnibus
    • Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools
    • Statement No. 40, Deposit and Investment Risk Disclosures
    • Statement No. 52, Land and Other Real Estate Held as Investments by Endowments
    • Statement 53
    • Statement No. 59, Financial Instruments Omnibus
    • Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions
    • Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees
    • Statement No. 72, Fair Value Measurement and Application
    • Statement No. 79, Certain External Investment Pools and Pool Participants
    • Statement No. 86, Certain Debt Extinguishment Issues
    • Statement No. 87, Leases
    • Statement No. 91, Conduit Debt Obligations
    • Statement No. 93, Replacement of Interbank Offered Rates
    • Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
    • Statement No. 96, Subscription-Based Information Technology Arrangements
    • Interpretation No. 1, Demand Bonds Issued by State and Local Governmental Entities
    • Interpretation No. 3, Financial Reporting for Reverse Repurchase Agreements
    • Interpretation No. 4, Accounting and Financial Reporting for Capitalization Contributions to Public Entity Risk Pools
    • Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.
  • Scope Exclusion Principle 3—not to include guidance for postemployment benefits, compensated absences, or termination benefits in the scope of the project. As a result, the following pronouncements are outside the scope of the project:
    • Statement No. 16, Accounting for Compensated Absences
    • Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, paragraphs 7–13
    • Statement No. 47, Accounting for Termination Benefits
    • Statement No. 67, Financial Reporting for Pension Plans
    • Statement No. 68, Accounting and Financial Reporting for Pensions
    • Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date
    • Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68
    • Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
    • Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions
    • Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans
    • Statement No. 82, Pension Issues
    • Statement No. 85, Omnibus 2017, paragraphs 8–25
    • Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans.
• In addition to the three scope exclusion principles, guidance issued after Statement 65, including guidance being developed in projects on the Board’s current technical agenda, is outside the scope of the project.
• The following topics are considered in the scope of the project:
  • Revenue recognition guidance for exchange transactions provided in paragraphs 23–28 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements
  • Expense recognition guidance for exchange transactions provided in paragraph 16 of Statement No. 34, Basic Financial Statements —and Management’s Discussion and Analysis —for State and Local Governments
  • Revenue and expense recognition guidance for nonexchange transactions provided in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions
  • Transactions with characteristics of both loans and grants
  • Revenue and certain expense recognition guidance for special assessments (reexamination of Statement No. 6, Accounting and Financial Reporting for Special Assessments, is not considered in scope)
  • Revenue and expense recognition for pass-through grants provided in paragraph 5 of Statement 24 (reexamination of criteria for financial and administrative involvement is not considered in scope)
  • Revenue recognition of escheated property, if applicable (reexamination of escheat guidance provided in Statement No. 21, Accounting for Escheat Property, is not considered in scope)
  • Revenue and expense recognition guidance for cable television systems provided in paragraphs 397 and 398 of Statement 62
  • Revenue and expense recognition guidance of service components excluded from the scope of Statements 87, 94, and 96
  • Consideration provided in the form of a financing component is in the scope developing measurement guidance.
• The following topics are excluded from the scope of the project:
  • Reexamination of contingency guidance provided in paragraphs 96—113 of Statement 62
  • Guidance for regulated operations provided in paragraphs 476-500 of Statement 62
  • Guidance for interfund activity provided in paragraph 112 of Statement 34 and in Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, as well as reclassifying transactions between the primary government and a blended component unit as internal activity
  • Topics related to the presentation of revenues and expenses, such as classification of operating and nonoperating revenue or program revenue
  • Topics related to required supplementary information, supplementary information, and notes to financial statements.
• Decisions about whether to address the following topics in the scope of the project are postponed:
  • Donation of capital assets
  • Revenue recognition for certain intangible assets out of scope of Statements 51, 87, 94, and 96.
  • Guidance on governmental funds measurement focus and basis of accounting, including guidance provided in paragraphs 62–69 and 70–73 of NCGA Statement 1, Governmental Accounting and Financial Reporting Principles.
• The scope should not be defined in the context of contracts with customers.
• A collectibility threshold should not be included as a scope boundary for transactions in this project.
• Alternative recognition methods for transactions in the scope of this project—specifically, the installment method and the cost recovery method—should not be retained.
• Moral and constructive obligations are included in the scope of the project
• The scope of the project does not include guidance related to fraudulent or illegal activities, though they will not be explicit scope exclusions.

Foundational Principles:

• The following five model assumptions are retained as part of the underpinnings of the revenue and expense recognition model:
  • Model assumption 1—revenues and expenses are of equal importance in resource flows statements.
  • Model assumption 2—revenues and expenses should be categorized independently and not in relation to each other.
  • Model assumption 3—establishing that the government is not acting as an agent for the citizenry, with the intent to prevent netting for revenues and expense should be continued.
  • Model assumption 4—symmetry should be considered, to the extent possible, in the application of the three components of the model.
  • Model assumption 5—a consistent viewpoint, from the resource provider perspective, should be applied in the analysis of revenues and expenses.
• The expense recognition model based on the five model assumptions will be retained.
• The recognition methodology proposed in the Preliminary Views should be retained as the structural basis for the project.
  • Wholly unperformed contracts should not be recognized.
    • For transactions that require a contractual binding arrangement, recognition of elements should not be considered before the execution of the contractual binding arrangement. 
• Recognition Attributes:
  • Refundability should not be considered a relevant recognition attribute for revenue or expense transactions.
  • Purpose restrictions should not be considered a recognition attribute that informs recognition; and, therefore, should not be combined with eligibility requirements.
  • The recognition attributes used to determine the applicability to a reporting period should be limited to be applied to transactions in the scope of this project with a prohibition for analogy.
    • Time requirements should be retained as a recognition attribute that establishes the recognition of deferred inflows and outflows of resources.
  • Revenue Recognition Methodology
    • The anchor for a revenue transaction should be identified as (1) an item of information that meets the definition of an asset that is a receivable or (2) the receipt of consideration before a receivable arises.
    • A liability should be recognized for consideration received in advance of an enforceable claim that is a receivable in both Category A and Category B revenue transactions.
    • Recognition of a deferred inflow of resources should be based on the flow’s applicability to a reporting period.
      • For Category A revenue transactions, the characteristic used to determine applicability
        to a reporting period is the satisfaction of a performance obligation.
      • For Category B revenue transactions, the characteristic used to determine the applicability to a reporting period is the satisfaction of time requirements.
        
    • Expense Recognition Methodology
      • The anchor for an expense transaction should be identified as (1) an item of information that meets the definition of a liability that is a payable or (2) the provision of consideration before a payable arises.
      • A prepaid asset should be recognized for resources provided in advance of a present obligation that is a payable in both Category A and Category B expense transactions.
      • Recognition of a deferred outflow of resources should be based on the flow’s applicability to a reporting period.
        • For Category A expense transactions, the characteristic used to determine applicability to a reporting period is the satisfaction of a performance obligation.
        • For Category B expense transactions, the characteristic used to determine the applicability to a reporting period is the satisfaction of time requirements.