The Governmental Accounting Standards Board (GASB) has initiated a current agenda project on the development of a comprehensive revenue and expense model for state and local governments. Because of the broad implications for a standard on that topic, the project is expected to last several years before a statement is issued. However, there are several due process documents planned along the way. The first of those documents, an Invitation to Comment (ITC), was published in January and can be found on GASB’s website.
An ITC is a document released to obtain public input before GASB makes tentative decisions on the topics included. The ITC for revenue and expense recognition focuses on options for the model that will provide the foundation for the rest of the project.
The models described in the ITC provide a framework for classification of revenue and expense transactions and then a broad method of recognition depending on the classification. Measurement is not addressed in the ITC as the recognition model needs to be determined first. Measurement—the process of determining a value of the elements present in financial statements—will be addressed in a later due process document. In addition, revenue and expenditure recognition in governmental funds is not addressed in the ITC, as that topic is under consideration in GASB’s project on the financial reporting model.
The first model presented in the ITC is the exchange/nonexchange model. This model is what currently exists in GASB literature. If it is retained, there would be more robust guidance provided to help in its application in practice. An exchange transaction is one in which each party receives and gives up essentially equal values. Nonexchange transactions are those in which a government gives or receives value without directly receiving or giving equal value in exchange. While this model is familiar, some GASB stakeholders have reported difficulty in applying this definition in practice.
- Classification: Is the transaction an exchange?
- Exchange: Recognize based on an earnings recognition approach
- Nonexchange: Recognize based on existing GASB Statement 33 provisions
Performance Obligation/No Performance Obligation Model
The second model presented in the ITC is the performance obligation/no performance obligation model. This model would represent a shift in thinking from the existing exchange/nonexchange model. However, it is a model that several other standard setters have recently adopted. The potential definition of a performance obligation, as used in the ITC, could be a promise in a binding arrangement between a government and another party to provide distinct goods or services to a specific beneficiary. The ITC goes on to elaborate on the concepts of binding arrangement, another party, distinct goods or services and specific beneficiary. While this model would represent a change, it may result in more consistent practice once understood and implemented.
- Classification: Does the transaction contain a performance obligation in a binding arrangement?
- Performance Obligation: Recognize based on performance obligation recognition approach
- No Performance Obligation: Recognize based on existing GASB Statement 33 provisions
Chapter 4 of the ITC acknowledges there could be other revenue and expense recognition models besides the two put forth in the document. For example, an alternative could be to use the exchange/nonexchange distinction for classification but then use a performance obligation approach for recognition. This chapter invites stakeholders to propose additional models for consideration for distinguishing revenue and expense transactions.
Appendix A of the ITC includes some examples of how the proposed models might work when applied to specific types of transactions. Application to property tax revenue, utility expense and revenue and a federal grant are illustrated and explained under both proposed models.
Providing Feedback on the ITC
Stakeholders interested in providing feedback on the ITC are encouraged to do so. Instructions are provided in the document for submitting written comments through email, which are due April 27, 2018. In addition, GASB is holding three public hearings where stakeholders can discuss their views directly with the Board members. Information on the dates and locations are included in the ITC and written comments must be provided in advance of a presentation.