On February 1, 2018, the GASB issued an Invitation to Comment (ITC), Revenue and Expense Recognition, which discusses a comprehensive revenue and expense recognition model for state and local governments. The FASB has recently overhauled their revenue recognition model and the GASB is following suit with the issuance of this ITC.
Why Do We Need a New Model?
The GASB believes a comprehensive revenue and expense model is necessary because:
- Current GAAP has limited guidance on exchange revenue and expense transactions.
- Current GAAP on nonexchange revenue and expense transactions could be clarified and improved.
- Other accounting standard setters, such as the FASB, are considering or implementing a performance obligation approach for revenue recognition.
- A comprehensive model would result in a more robust, principles-based guidance that would provide guidance on a wide range of transactions, even those which currently have no existing guidance, and improve comparability of governmental entity reporting.
The ITC addresses classification, recognition and measurement issues as well as potential benefits and potential challenges for each of the following models:
- Exchange/nonexchange model. This model classifies transactions based on the current GAAP definition for exchange and nonexchange transactions and bases the recognition of nonexchange transactions on existing guidance (found in GASBS No. 33, as amended). However, it would expand on current concepts and highlight areas that may need to be modified. An earnings recognition approach (that is, recognition when earned either at a point in time or over time) is discussed for the recognition of exchange transactions.
- Performance obligation/no performance obligation model. This model classifies transactions based on a tentative definition of performance obligation for the governmental environment and bases recognition of transactions without a performance obligation on existing guidance (found in GASBS No. 33, as amended). A performance obligation recognition approach is discussed for the recognition of transactions with a performance obligation, which closely follows the concepts in FASB ASC 606 [i.e., determine the amount expected to be received, allocate the amount to the performance obligation(s) and recognize the allocated amount when the performance obligation(s) are satisfied at a point in time or over time].
The GASB may consider other models based on feedback received. An alternative approach suggested in the ITC is a combination of the exchange/nonexchange model and the performance obligation/no performance obligation model. This alternative approach could base recognition of nonexchange transactions on existing guidance (found in GASBS No. 33, as amended) and nonexchange transactions on a performance obligation recognition approach (discussed above).
The ITC also provides an appendix with illustrative examples for property tax, utility revenue and expense, and grants. Each of the examples are illustrated under both the exchange/nonexchange model and the performance obligation/no performance obligation model.
The full ITC is available at www.gasb.org
The GASB is seeking input from stakeholders on the benefits and challenges in each of these two models. The GASB would like to obtain information before moving forward with deliberations on new or revised standards and is planning numerous public hearings to obtain feedback. Comments are due by April 27, 2018, and public hearings will be held in May in St. Louis, MO; Burlingame, CA; and Norwalk, CT.
Details about how you can weigh in with your comment or presentation at a public hearing can be found on the GASB’s website at www.gasb.org
Future of the Project
The FASB indicates that a preliminary views document is projected for May of 2020, an exposure draft in December of 2021 and a final statement is not expected until March of 2023. As always, we will keep you informed of the project’s progress along the way. If you have any questions related to the information above, reach out to your Elliott Davis advisor.