GASB Preliminary Views on Revenue and Expense Recognition

February 19, 2021

Scott Schuster, Justin Hayes, Trent Parkinson

As recent standard-setters such as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have tackled large revenue recognition projects and overhauls, it was just a matter of time before the Governmental Accounting Standards Board (GASB) would work on the development of a comprehensive revenue and expense recognition model. The GASB has also seen increased complexity in applying its standards around revenue recognition and inconsistency across different segments of local government. The GASB’s goal is to provide a comprehensive model for the recognition of revenue and expense transactions to enhance the usefulness of the financial information used for making decisions or assessing a government’s accountability. To address all of this, the GASB has issued Preliminary Views – Revenue and Expenses.

The GASB’s Revenue and Expense Recognition Model

The proposed revenue and expense recognition model contains three components: categorization, recognition, and measurement. The currently existing transaction-based guidance relies on specific definitions to describe the transactions that should be recognized and measured under that specific guidance (making the scope of the guidance very narrow). Revenue and expense transactions occur in a wide range of circumstances and facts; as such, the GASB believes that categorization needs determined first, prior to addressing the elements of recognition and measurement.

Categorization

The Preliminary Views shift entirely away from current guidance, which requires an entity to evaluate whether a transaction is an exchange, exchange-like, or nonexchange transaction based on an assessment of equal value. Instead, the proposed guidance considers four questions, in sequential order, for both revenue and expense transactions to determine categorization:

Is there a binding arrangement (i.e., contract, grant agreement, memorandum of understanding, or legislation)?
Have the parties to the transaction approved the terms and conditions of the binding arrangement (there is mutual assent of the parties)?
Do the parties to the transaction have substantive rights and obligations?
Are the substantive rights and obligations interdependent?

If a transaction does not include a binding arrangement, the proposed revenue and expense recognition model does not apply to the transaction.

If the answer to all four questions above is “yes,” the transaction would be identified as a Category A transaction. Some examples of possible Category A transactions include fee-for-service arrangements, cost reimbursement-based grants, and most expenses. Otherwise, it would be identified as a Category B transaction. Possible examples of Category B transactions include taxes and special assessments, purpose-restricted grants, donations, and penalties and fees.

Recognition

The recognition of a transaction is based on if it is a Category A or Category B transaction as determined based on the four questions noted above.

Category A Transactions

For Category A transactions, revenues and expenses would be recognized based on the satisfaction of a performance obligation. Performance obligations are represented by distinct goods or services within the binding arrangement. Recognition occurs upon the satisfaction of a performance obligation when (or as) one of the parties transfers control of a resource (the distinct good or service) to the other party. A performance obligation may be satisfied, and therefore, related revenues and expenses be recognized, all at once (known as “point in time”) over time.

Category B Transactions

The Preliminary Views provide five subcategories for Category B transactions, as described below. The first two subcategories are revenue-only transactions. Transactions within subcategories 3, 4, and 5 relate to both revenue and expense transactions.

Derived Revenue – Recognized when the underlying transaction occurs

For example, a sales tax revenue and receivable would be recognized when a sale occurs subject to taxation.

Imposed Revenue – Recognized on the imposition date or the date of the omission or commission of an act

For example, property tax receivables would be recognized when the tax is imposed; property tax revenues would be recognized based on the period for which it is imposed.

Contractual Binding Arrangement – Recognized based on the terms and conditions specified in the agreement

For example, a receivable and revenue would be recognized for a contribution without a time requirement when the pledge agreement is executed.

General Aid to Government – Recognized based on the existence of a provider government’s appropriation, the commencement of the appropriation period, and the provider government’s intent to provide resources

For example, a general aid revenue and receivable would be recognized when the state appropriates the aid to a school district and has demonstrated its intent to provide the resources, and the payment is due.

Shared Revenue – Same as general aid to government, recognized based on the existence of a provider government’s appropriation, the commencement of the appropriation period, and the provider government’s intent to provide resources

Measurement

Once the transaction is recognized, the next step is measurement. The Preliminary Views propose only a foundational principle and two application topics, and they note that a future due process document will include additional measurement proposals.

The foundational principle is that assets and liabilities would be measured directly, and revenues and expenses would be measured by relying on their related asset or related liability. This is consistent with current guidance.

The application topics propose that revenue would be recognized net of amounts probable of being refunded, with a liability recognized for probable refunds and that revenue would be recognized net of probable uncollectible amounts with a corresponding allowance for doubtful accounts.

How the Changes Proposed Would Improve Financial Reporting

The GASB’s goal in issuing the Preliminary Views is to enhance the understandability, reliability, relevance, consistency, and comparability of state and local government financial reporting by providing a comprehensive model for the recognition of revenue and expense transactions.

The Preliminary Views provides a categorization methodology that focuses on the transaction characteristics that can be applied to a broad range of transactions instead of specific guidance for individual types of transactions, providing more reliable and consistent transaction categorization, which will then result in more reliable and consistent recognition of revenue and expense transactions.

Next Steps

The GASB has tentatively scheduled various public hearings and user forums to solicit feedback from the public on the proposed changes and framework expressed in the Preliminary Views.

The tentative dates and locations for the public hearings is as follows:

March 23, 2021, in Boise, ID (in conjunction with the annual conference of the National Association of State Comptrollers)
March 30-31, 2021, in Atlanta, GA
April 8, 2021, in New York, NY
April 13-14, 2021, in Chicago, IL
April 20-21, 2021, in San Francisco, CA

The tentative dates and locations for the user forums is as follows: