On June 30, the Governmental Accounting Standards Board (GASB) released a Preliminary Views (PV) document, Revenue and Expense Recognition. The PV is a major step toward what could be a significant change in the way governmental entities categorize, measure, and recognize revenue and expenses.
Categorization is the process of classifying a transaction by identifying its relevant characteristics with a context of a group of similar transactions. The proposed categorization methodology would move away from the traditional determination of whether a transaction is exchange, exchange-like, or nonexchange based on an assessment of equal value, and instead determine whether transactions include a “binding arrangement” and a “performance obligation” based on the application of four characteristics:
- Whether there is a binding arrangement, such as a contract, a grant agreement, a memorandum of understanding, or legislation
- Whether the parties to the transaction have approved the terms and conditions of the binding arrangement (there is mutual assent between parties of capacity)
- Whether the parties to the transaction have substantive rights and obligations
- Whether the substantive rights and obligations are interdependent
When a transaction has all four of the characteristics, it contains a performance obligation and would be classified as a Category A transaction. Otherwise, it would be classified as a Category B transaction.
Recognition is the process of determining when an item should be reported as an element (such as an asset or an inflow of resources) in financial statements. The recognition proposals are based on the type of transaction, as identified using the categorization methodology.
Recognition for Category A transactions is based on the satisfaction of a performance obligation. A government determines each performance obligation in a binding arrangement by identifying distinct goods or services. The recognition of revenues and expenses occurs upon the satisfaction of those performance obligations. A performance obligation is satisfied when (or as) one of the parties transfers control of a resource (distinct good or service) to the other party. A performance obligation may be satisfied over time or at a point in time.
Recognition for Category B transactions is based on recognition triggers within five possible sub-categories:
- Derived revenue–with a trigger that identifies when the transaction occurred
- Imposed revenue–with a trigger that identifies an imposition date or date of omission or commission of an act
- Contractual binding arrangements–with triggers based on terms and conditions specified in the binding agreement
- General aid to governments–with triggers tied to appropriations provided, the appropriation period and the provider’s intent to provide resources
- Shared revenue–with recognition triggers that are the same as general aid to governments
Measurement is the process of determining the amount at which elements should be reported in financial statements. The proposed measurement principle is that assets and liabilities are measured directly, and revenues and expenses are measured based on the related asset or related liability. Revenue recognized is net of amounts probable of being refunded or uncollectible.
GASB is seeking feedback on the following topics:
- Categorization of transactions into two types identified as Category A and Category B, based on the four characteristics
- Asset recognition for Category A and Category B revenue transactions
- Liability recognition for Category A and Category B expense transactions
- Clarification of guidance regarding deferred inflows of resources and deferred outflows of resources for transactions in the scope of this project
- Expansion of guidance for revenue and expense recognition for Category A transactions
- Measurement principles
The comment period for the PV ends February 26, 2021.