If a transaction does not include a binding arrangement, the transaction would be excluded from the scope of this project. If a transaction has all four of the characteristics, it contains a performance obligation and would be identified as a Category A transaction. Otherwise, it would be identified as a Category B transaction.

The recognition proposals are based on the type of transaction, as identified using the categorization methodology. For Category A transactions, revenues and expenses would be recognized based on the satisfaction of a performance obligation. A government would determine each performance obligation in the 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 (the distinct good or service) to the other party. A performance obligation may be satisfied over time or at a point in time.

The recognition approach for Category B transactions would be based on five subcategories of transactions: (1) derived revenue, (2) imposed revenue, (3) contractual binding arrangement, (4) general aid to governments, and (5) shared revenue. The first two subcategories are revenue-only transactions. The other three involve both revenue and expense transactions.

The measurement proposals in this Preliminary Views are limited to a foundational principle and two application topics. Consistent with existing guidance, the proposed 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.

The first application topic is that revenue would be recognized net of amounts probable of being refunded; that is, governments would recognize a liability for revenue transactions that include a right of refund when that refund is probable. The second application topic is that revenue would be recognized net of amounts probable of becoming uncollectible with a corresponding allowance for doubtful accounts.

Chapter 7 of this Preliminary Views includes a description of the application of the Board’s proposals in two other Exposure Drafts being issued, a proposed Statement, Financial   Reporting   Model   Improvements, and a proposed Concepts Statement, Recognition of Elements of Financial Statements. Appendix C of this Preliminary Views includes illustrations of the application of the revenue and expense recognition model.

The Board’s proposed requirements in this Preliminary Views, if ultimately issued as a Statement, would enhance the understandability, reliability, relevance, consistency, and comparability of state and local government financial reporting by providing a comprehensive model for the recognition of a broad range of revenue and expense transactions.

The application of the categorization methodology proposals in this Preliminary Views, which focus on the underlying characteristics of the transactions, would allow governments to more reliably and consistently categorize revenue and expense transactions. The recognition proposals in this Preliminary Views correspond to the transaction category; consequently, the recognition of elements of financial statements also would be more reliable and consistent. The resulting financial information would be more understandable, reliable, relevant, consistent, and comparable, which would allow users to better assess interperiod equity and accountability. Finally, the proposed categorization model would establish a foundational approach, which may be useful for future standards setting.

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

2. The following three components comprise a revenue and expense recognition model:

The scope of this project includes the categorization, recognition, and measurement of revenues and expenses from a wide range of transactions. However, three groups of transactions are excluded:

Additionally, the scope of this project includes donations of financial resources that are not specifically excluded above. Therefore, donations of capital assets, in-kind contributions, and contributed services are not in the scope of this project. A list of the pronouncements that are included and excluded from the scope of this project is provided in Appendix B.

4. The provisions presented in this Preliminary Views, if adopted as final standards, would be applied to financial statements of all state and local governments.

5. In addition to this Preliminary Views, the Board has approved two related Exposure Drafts—Financial Reporting Model Improvements (Financial Reporting Model Improvements Exposure Draft) and Recognition of Elements of Financial Statements (Recognition Concepts Exposure Draft). Chapter 7 of this Preliminary Views describes the application of the Board’s proposed concepts and accounting standards included in the aforementioned Exposure Drafts as they relate to transactions within the scope of this project. Appendix C includes cases that illustrate the application of provisions proposed in those documents to certain transactions in the scope of this project.

6. The Board’s decision to add this project to its technical agenda in April 2016 was primarily informed by two considerations. First, a post-implementation review (PIR) was conducted for Statements No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues. The results of the PIR indicated that the guidance contained in those two pronouncements was effective; however, specific financial reporting challenges were identified. Among those challenges was that stakeholders experience difficulties differentiating between exchange and nonexchange transactions. The second major consideration was that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued guidance for revenue recognition from contracts with customers. The FASB and the IASB guidance for revenue recognition focused on the fulfillment of a performance obligation. Based on those considerations, the Board concluded that now is the appropriate time to develop a comprehensive model for revenue and expense recognition for governments. ³

7. In 2018, the Board issued an Invitation to Comment, Revenue and Expense Recognition, that included descriptions of three models. The first model relied on the exchange/nonexchange categorization methodology (primarily based on existing guidance), and the second model presented a performance obligation/no performance obligation categorization methodology. A third hybrid model, which combined the two methodologies, was included as an example. Stakeholder feedback on the Invitation to Comment models was mixed; that is, stakeholders expressed preferences for each of the three models presented. ⁴

8. Based on stakeholder feedback on the Invitation to Comment, the Board decided to conduct additional analysis to assess the suitability of the categorization methodologies. The analysis demonstrated that both the exchange/nonexchange and the performance obligation/no performance obligation categorization methodologies, as described in the Invitation to Comment, offered limited suitability.

9. The Board considered the various characteristics of the existing definitions of exchange, exchange-like, and nonexchange transactions, each of which focuses on the key concept of equal value. After considering those characteristics, the overall conclusion reflected in the Board’s preliminary views is that relying on value as a categorization tool is unreliable because value reflects the subjective perceptions of the parties to the transaction. Value is not a characteristic of the item in the transaction nor of the transaction itself; therefore, it is not feasible to clarify the meaning of value. In an attempt to overcome that challenge, existing literature relies on additional characteristics, such as benefit and cost recovery. However, those characteristics have proven to be equally unreliable. Benefit also is subjective and, similar to value, reflects the resource recipient’s perception of utility. Cost recovery communicates a governing body’s decision about charges for services and therefore reflects public policy, not a clarification of value.

10. Furthermore, it has been observed in practice that some stakeholders determine whether a transaction is exchange, exchange-like, or nonexchange based on an arbitrary percentage of market prices. In other words, those stakeholders consider whether the amount of consideration transferred for a resource corresponds to a certain percentage of the market price for that resource. That approach results in inconsistencies because the same percentage is not used across various governments. Even if a single percentage were proposed, the Board does not believe that the relative proportion of consideration is indicative of the type of transaction.

11. A challenge that arises from inconsistency in the categorization of transactions as exchange, exchange-like, or nonexchange is that stakeholders may not consistently identify the appropriate recognition and measurement provisions relevant to a specific transaction. Therefore, it is possible for two governments to arrive at different categorization conclusions for similar transactions. Furthermore, certain transactions may simultaneously meet the definitions of exchange, exchange-like, and nonexchange transactions, which results in fragmentation in the application of the literature. In other words, stakeholders may not be certain which recognition provisions may be applicable and, consequently, may rely on incorrect recognition provisions that distort information. For example, if an exchange transaction is recognized following the provisions for nonexchange transactions, the amounts reported in financial statements or the timing of their reporting may not be appropriate. As a result, the information reported in financial statements may not be as understandable, reliable, relevant, consistent, and comparable as it should be.

12. The Board also considered the various characteristics of the performance obligation/no performance obligation categorization methodology and concluded that the definition of a performance obligation presented in the Invitation to Comment was overly complex. The complexity identified in the definition of a performance obligation also might result in inconsistent categorization of transactions. Therefore, the Board concluded that the methodology presented in the Invitation to Comment was not suitable for achieving the objective of this project. However, the Board did find many of the underlying attributes of a performance obligation model presented in the Invitation to Comment to be valuable in developing recognition principles, as noted below.

13. As previously stated, the hybrid model combined the exchange/nonexchange categorization methodology with the performance obligation recognition approach. As previously noted, the Board concluded that the exchange/nonexchange categorization model was unsuitable. Furthermore, the hybrid model posed an additional challenge: because it combined the first two models presented in the Invitation to Comment, there was the potential to require a performance obligation recognition approach for certain transactions identified at present as exchange-like (which may not include performance obligations). Conversely, this model would have required recognition as nonexchange transaction grants that included performance obligations.

14. Based on the analysis conducted subsequent to the Invitation to Comment, the Board decided to develop a new categorization methodology that retains the relevant characteristics from the two categorization  methodologies  proposed  in  the  Invitation  to  Comment. For example, the characteristic of “something for something” in the exchange/nonexchange model and the characteristic of distinct goods or services in the performance obligation/no performance obligation model were useful in categorizing transactions. ⁵ Because the categorization methodology proposed in this Preliminary Views was developed from specific characteristics of the exchange/nonexchange and performance obligation/no performance obligation categorization methodologies in the Invitation to Comment, the Board decided to use the neutral categorization nomenclature of Category A and Category B in this document to make clear that it did not select any of the Invitation to Comment models. This new categorization methodology aims to include in Category A those revenue or expense transactions that include at least one performance obligation, and to identify Category B transactions as those that do not possess the characteristics of Category A transactions (and therefore do not include performance obligations). The application of the categorization methodology is described in Chapter 3.

15. One of the purposes of this project is to consider the performance obligation approach. The Board believes that the performance obligation approach constitutes a global shift away from the earnings recognition approach. Therefore, it provides an opportunity to address the recognition challenges identified in existing literature related to certain revenue and expense transactions. Specifically, the performance obligation recognition approach offers an opportunity to create consistency in the recognition of transactions that are identified in this document as Category A. (See Chapters 4 and 5.)

16. This Preliminary Views incorporates existing guidance provided in  Statements  33 and 36 that the Board identified as effective and consistent with the conceptual framework. The Board proposes modifications to existing guidance for aspects identified as challenging, for example, the identification of when a receivable should be recognized for property taxes. The Board also proposes modifications to existing guidance for aspects that can be better aligned with the current conceptual framework, for example, the recognition of pledges that are subject to time requirements. (See Chapter 4.)

17. Measurement proposals included in this document are limited to a measurement principle and two application topics. A future due process document will include additional measurement proposals to further support the aforementioned recognition proposals. (See Chapter 6.)

18. The Board expects that the outcomes of this project would result in specific benefits for auditors, preparers, and users of financial statements. Additionally, the guidance developed in the project is expected to serve as a foundation for the development of future standards.

19. The Board believes that the proposed categorization methodology is capable of producing understandable, reliable, relevant, consistent, and comparable results for stakeholders when identifying the type of transactions prevalent in governments, whether those transactions are recurring or unusual, because the foundation of the categorization methodology focuses on the characteristics of transactions. An effective and consistent categorization process would allow preparers and auditors of financial statements to identify the appropriate recognition and measurement provisions for each type of transaction, and, therefore, the information presented in financial statements would be representative of that transaction, which would enhance the quality of information provided to financial statement users.

20. The Board believes that achieving the goal of comprehensive guidance is not feasible by only filling the gaps in existing literature because the fragmentation in the literature (as previously described) is a structural issue, in part because of the reliance on the subjective concept of value. Therefore, a consistent categorization methodology is necessary to (a) expand guidance where little or no guidance currently exists and (b) avoid incongruent recognition conclusions. Furthermore, it is expected that applying this consistent approach would help preparers and auditors better understand the underpinnings of revenue and expense recognition, which would assist them in reducing the inconsistent application observed in current practice.

21. As noted above, the expected outcome of this project for users of financial statements is an improvement in the understandability, consistency, and comparability of information they receive from governmental resource flows statements. That improvement enhances the reliability and relevance of that information, which would be expected to assist users in their assessment of interperiod equity. Interperiod equity “. . . help[s] users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided.” ⁶ That is, the recognition of both revenues and expenses in the appropriate reporting period is critical to the decision usefulness of information and the assessment of accountability.

22. The Board believes that this new categorization methodology represents a fundamental shift in perspective about how transactions are considered in the governmental environment. Traditionally, stakeholders considered whether a transaction was an exchange depending on the amount of consideration associated with the transaction, thereby making the amount of consideration an indicator of equal value. However, the public-purpose motivation of the governmental environment runs counter to relying on the consideration amount as an identifying feature of the type of transaction. The proposed categorization methodology effectively minimizes reliance on the amount of consideration for categorization purposes and focuses on the characteristics of transactions, which the Board considers to be more relevant. The Board believes that this fundamental shift in perspective would establish a foundational approach, and thus the principles presented in this document could be applied in the future to address issues outside the scope of this project.

23. The objective of this Preliminary Views is to seek stakeholder feedback about the Board’s current views related to a revenue and expense recognition model. Specific topics to consider include:which the respondent would like

24. The Board intends to redeliberate those topics based on feedback received on this Preliminary Views before issuing an Exposure Draft of a proposed Statement for public comment. Additional topics that are expected to be addressed in that Exposure Draft that are not included in this Preliminary Views include:

25. One of the principles guiding the GASB’s setting of standards for accounting and financial reporting is the assessment of expected benefits and perceived costs. The GASB strives to determine that its standards address a significant user need and that the costs incurred through the application of its standards, compared with possible alternatives, are justified when compared with the expected overall public benefit. The potential benefits of the model are highlighted throughout this Preliminary Views. At this point, the GASB has not fully assessed the potential costs of implementing the model. One purpose of this Preliminary Views is to obtain additional input on the perceived challenges (which could equate to costs) and expected benefits associated with the improved information.

1. As discussed in Chapter 1, the objective of this project is to develop a comprehensive, principles-based model that establishes categorization, recognition, and measurement guidance applicable to a wide range of revenue and expense transactions. In order to accomplish that objective, the Board concluded that establishing foundational principles for certain aspects of the model was needed so that preliminary views reached by the Board related to the three components of the model were consistent. This chapter describes the Board’s preliminary views associated with the foundational principles of the revenue and expense recognition model and explains the rationale for those views. Some of the principles discussed in this chapter also are expressed as preliminary views in other chapters.

2. The Board used the following five model assumptions as underpinnings for the development of the revenue and expense recognition model:

3. Model assumption 1 allows for the proposed recognition principles in this model to be applied independently for revenues and expenses, so that the recognition of a revenue or an expense is not influenced by a related revenue or expense. In arriving at that conclusion, the Board considered whether revenues should be dependent on the recognition of the related costs of service or whether expenses should be recognized by matching them to the revenues they generate. Historically, that matching principle may have been the basis for determinations about the period in which expenses were recognized in some private-sector accounting standards. That approach effectively subordinates expense recognition to revenue recognition. The Board acknowledges that matching is not a principle in the GASB conceptual framework; rather, that framework identifies interperiod equity as the key relationship between revenues and expenses because it “. . . help[s] users assess whether current-year revenues are sufficient to pay for the services provided that year. . . .” ⁷ For that reason, the Board concluded that revenues and expenses should be recognized independently by relying on their respective definitions: ⁸

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⁴Net assets are assets netted with liabilities.

4. The main recognition attribute of revenue and expense transactions is the inflow’s or outflow’s applicability to a reporting period. Therefore, the Board concluded that applicability to a reporting period also should be assessed independently for revenues and expenses. That approach would allow for information presented in resource flows statements to adequately represent the results of that reporting period’s activity, which allows for a better assessment of interperiod equity and, as a result, government accountability.

5. Model assumption 2 allows for the categorization of expense transactions independently from the source of revenue to which the expense relates. That is, revenue transactions are categorized independently from the programs they fund. In practice, the categorization of expense transactions is not always considered independently from revenues. Some stakeholders may categorize expense transactions based on the category of the source of funds. For example, if a city relies on property taxes to fund public safety, some stakeholders may conclude that public safety expense transactions would be categorized in the same manner as property tax transactions.

6. The Board believes that an independent categorization of revenue and expense transactions is appropriate because the categorization of expense transactions should be based on their characteristics and should not be affected by public policy, which may seek to associate specified revenues with the provision of certain goods or services (further discussed in paragraphs 11–16 in this chapter). If the revenue transaction categorization were to dictate the categorization of expense transactions, the categorization of expense transactions could be inconsistent among governments solely because of public policy effects. For example, it has been observed that solid waste collection services can be funded by at least three approaches:(a) a government may charge fees to recover the entire cost of the service, (b) a government may rely entirely on property taxes to provide the service, or (c) a government may charge fees to partially recover the cost of the service and subsidize the remainder with general resources of the government. If expense transactions were categorized based on the revenue policy used to fund the activity, the solid waste expenses would be categorized differently in each of those three scenarios.

7. Considering the government as an economic entity (model assumption 3) prevents reporting revenues net of expenses, or expenses net of revenues for related transactions in the scope of this project. Some stakeholders believe that from a public policy perspective, a government acts as an agent of the citizenry. However, if that belief is further extended to accounting and financial reporting, one could argue that to represent its role as an agent, a government should recognize revenues and expenses net of each other for the activities and services provided to the citizenry. The Board believes that the financial information of a government would be obscured by netting revenues and expenses and, for that reason, concluded that for accounting and financial reporting purposes, a government is an economic entity.

8. Furthermore, the Board concluded that if a government believes it may be acting as an agent (custodian) in a specific activity, the government should first assess whether it is engaged in a fiduciary activity by applying the provisions of Statement No. 84, Fiduciary Activities.

9. Model assumption 4 allows for categorization, recognition, and measurement proposals that are consistent between revenues and expenses and among categories of transactions. The symmetrical consideration is not intended to convey that symmetrical results are necessary between revenue and expense recognition. Rather, the intent of this model assumption is to convey that symmetrical principles should be developed for categorization, recognition, and measurement proposals applicable to revenues and expenses. It should be noted that in practice, recognition outcomes (in other words, when an item is recognized as an element of financial statements) may be different because of unavailability of information or reliance on estimates.

10. Model assumption 5 allows for the use of a consistent point of view when analyzing distinct goods or services and the transfer of control of resources. In Chapters 4 and 5, the Board expresses a preliminary view regarding the proposed application of a performance obligation recognition approach. In support of that view, model assumption 5 establishes that the point of view of the party that is incurring the expense (the counterparty in revenue transactions and the government in expense transactions) should be relied upon in the analysis to identify distinct goods or services and transfer of control of a resource. As explained in Chapter 4, the assessment of distinct goods or services is informed by the characteristics of the identified goods or services within the context of the binding arrangement.

11. As previously mentioned, the outcomes of model assumptions 1 and 2 allow the Board to propose independent categorization and recognition for expense transactions. The Board believes that it is necessary to establish this foundational principle because existing accounting literature is limited with regard to expense recognition. Some stakeholders believe that the appropriate recognition underpinning for expense transactions is to subordinate their recognition to revenues so that expenses can be matched ⁹ to the corresponding revenue. Model assumptions  1 and 2 prevent expense  recognition based on  matching. Matching  also  is not relevant in reporting for business-type activities because the GASB’s conceptual framework does not apply different concepts to governmental activities and business-type activities.

12. Some stakeholders believe that the appropriate conceptual underpinning for expense recognition is to rely on the revenue transaction category. That is, expense transactions could be categorized depending on the source of revenue that funds the activity. That approach focuses on identifying a relationship between the revenue and the benefit of the related expense transaction. In order to assess whether that approach was reliable for governments, the Board studied the effects of benefits in expense transactions. In the analysis, the Board identified two distinct facets in expense transactions. The first facet is the relationship between the government and the counterparty, and the second facet is the relationship between the government and the citizenry it serves (the benefit aspect).

13. Consider an expense transaction in which a government employs a police officer and deploys the police officer’s service capacity to provide public safety; the question is, who benefits from the service?

The first facet in the expense transaction is the relationship between the government and the police officer. The second facet in the expense transaction is the relationship between the government and the recipient of the police protection. When considering the categorization of the expense transaction, the Board concluded that reliance on the first facet produced consistent results, whereas reliance on the second facet produced inconsistent results.

14. As explained in Appendix A, the public nature of governmental goods or services usually produces positive externalities (benefits that reach a broader audience than the direct resource recipients). As a government incurs expenses in the provision of public services, the expense transactions may produce far-reaching benefits for the citizenry. Therefore, identifying the specific beneficiary of the transaction is inherently more challenging because governments would need to assess whether the benefit of governmental expenses is to provide services to the society as a whole, a specific segment of a society, or an individual. If the police officer in the example responds to an emergency call to assist a homeowner whose home is being burglarized and the police officer captures the alleged perpetrator, how would the assessment of benefit be made? The homeowner is the direct beneficiary; however, the neighborhood and potentially the city also would benefit from the police officer’s actions. Therefore, the identification of a beneficiary is not straightforward. Furthermore, the second facet of the transaction, the relationship between the government and the society, also conveys information about the government’s public policy decisions—which services should be provided. Given the challenges of identifying benefits and the influence of public policy decisions, it usually is not reliable to analyze expenses by focusing on the second facet of expense transactions.

15. Conversely, the Board considered focusing expense categorization on the first facet of the expense transaction and concluded that it produces consistent results because it avoids the challenge of identifying beneficiaries. It should be noted that this approach results in a majority of expense transactions in the governmental environment being identified as Category A transactions. For example, employee salaries would be identified as Category A expenses regardless of whether the employee’s salary is funded by fees or property taxes, or whether the employee’s work provides an exclusive benefit to fee payers (such as utilities) or general benefits to society as a whole (such as public safety). Very few expense transactions would be identified as Category B. Examples of Category B expense transactions would include purpose-restricted grants, shared revenues, and general aid to governments.

16. At present, some stakeholders believe that expenses funded through taxes should be considered nonexchange transactions because the benefits of the expense transactions are provided for the collective benefit of the citizenry. The tentative decisions of the Board in this project apply a different approach. The Board acknowledges that this approach to categorization of expense transactions represents a major change from the way that some governmental expenses may have been viewed in the past. The Board believes that this approach would produce more consistent results when governments assess transactions as Category A or Category B and thereby would result in the application of the appropriate recognition guidance for expenses.

17. The categorization methodology, as explained in Chapter 1, was developed by considering the effective characteristics identified in the exchange/nonexchange methodology and the performance obligation/no performance obligation methodology. The two major characteristics that provided the categorization underpinnings were (a) “something for something,” which was identified by stakeholders as a means to assess exchange transactions, and (b) the identification of performance obligations. Combining those two major characteristics resulted in the principles expressed in Chapter 3 for categorization. That is, Category A transactions represent an acquisition of resources coupled with a sacrifice of resources that are interdependent. Category B transactions are acquisitions without sacrifices, sacrifices without acquisitions, or acquisitions and sacrifices that are not interdependent.

18. A recognition methodology was developed by combining the definitions of an inflow of resources and an outflow of resources with the hierarchy of recognition for elements of financial statements (hierarchy of recognition). ¹⁰ Because this methodology was derived from the conceptual framework, it is applied to all revenue and expense transactions regardless of their category. It is notable that the recognition methodology described in detail in paragraphs 20–31 in this chapter is an analytical tool that assisted in the development of principles-based guidance, which is presented in Chapters 4 and 5. Application guidance is more specific and is tailored to whether the transaction being analyzed is identified as Category A or Category B. For that reason, stakeholders would not be expected to apply the recognition methodology described in this chapter but could rely on this analytical tool to better understand the application proposals expressed as preliminary views of the Board in Chapters 4 and 5.

19. As a result of relying on the hierarchy of recognition, the recognition methodology described in this section focuses on the recognition of assets (increase in net assets) for revenue transactions and the recognition of liabilities (decrease in net assets) for expense transactions. Some stakeholders find this approach counterintuitive because they believe the focus should be on the recognition of revenues and expenses directly. The Board concluded that reliance on the hierarchy of recognition provides a methodical and disciplined approach for achieving the objective of providing principles-based guidance for a broad range of revenue and expense transactions.

20. The proposed revenue recognition methodology consists of four steps as listed below and as depicted in the subsequent flowchart.

21. Net assets are described as assets netted with liabilities. ¹¹ The focus of the recognition methodology developed in this project is to consider each element of financial statements independently. The purpose of step  1 is to assist governments in determining whether an  item should be recognized as an element of financial statements. Therefore, the determination of whether there is an increase in net assets in a revenue transaction in step 1 is based on consideration of the existence of a receivable, the receipt of cash, the extinguishment of a liability by a counterparty, or a combination of those circumstances that effectively increases net assets—but without considering whether that increase in net assets also represents a related liability (step 2), a deferred inflow of resources (step 3), or a revenue (step 4). Steps 2–4  of the recognition methodology assist in identifying the appropriate   element of financial statements that should accompany the recognition of the increase in net assets (step 1).

22. The first step in the revenue recognition methodology is to determine the point in time at which a government has an increase in net assets (in isolation from any other element that arises from the transaction). An increase in net assets can be evidenced by (a) a legally enforceable claim that is a receivable, (b) the receipt of resources from a counterparty as an advance, (c) another party’s extinguishment of liabilities on behalf of the government, or (d) a combination of a–c pursuant to a revenue transaction. Determining that a government has an increase in net assets establishes that a revenue-related transaction has occurred that requires recognition of an element of financial statements—generally, the inception of the transaction.

23. The second step in the recognition methodology is to determine whether a government has a present obligation related to the increase in net assets. The Board concluded that a related liability arises if a government receives resources before a legally enforceable claim has been established (in which case, the resources are an advance). The Board concluded that a liability should be recognized regardless of whether the resources are refundable. For example, resources received prior to the government satisfying its performance obligation in a Category A transaction would represent a related liability (that is, a present obligation to perform). Similarly, if a government receives property tax payments before the government has imposed a levy, the government has an increase in net assets that results in a related liability (a present obligation) because the government has received resources in advance of having established a legally enforceable claim to those resources through the imposition of the property tax.

24. The third step in the recognition methodology is to determine whether an increase in net assets that does not have a related liability should result in the recognition of a deferred inflow of resources. To make that assessment, the Board proposed recognition attributes that would assist stakeholders in determining the applicability to a reporting period of inflows of resources in the scope of this project. (See the discussion of applicability to a reporting period in paragraphs 32–35 in this chapter.) The rationale for this approach relates to the constraint imposed by the conceptual framework regarding the recognition of certain elements, as follows: “Recognition of deferred outflows of resources and deferred inflows of resources should be limited to those instances identified by the GASB in authoritative pronouncements, which are established after applicable due process procedures.” ¹² Based on the attributes presented in paragraph 33 in this chapter, for example, a government that has imposed a property tax would recognize a receivable and a deferred inflow of resources if the property tax is imposed for a subsequent reporting period.

25. The fourth step in the recognition methodology provides for the recognition of revenue as a result of the prior steps; that is, an increase in net assets has been identified that does not have a related liability and is not applicable to a future period. Consequently, the government would recognize the increase in net assets as revenue. Proposals related to application guidance for revenue recognition are presented in Chapter 4.

26. Similar to the revenue recognition methodology, the proposed expense recognition methodology consists of four steps as listed below and depicted in the subsequent flowchart.

27. As previously noted, net assets are defined as assets netted with liabilities. The focus of the recognition methodology developed in this project is to consider each element of financial statements independently. The purpose of step 1 is to assist governments in determining whether an item should be recognized as an element of financial statements. Therefore, the determination of whether there is a decrease in net assets in an expense transaction in step 1 is based on a consideration of the existence of a payable, the provision of cash to a counterparty, or a combination of those circumstances that effectively decreases net assets—but without considering whether that decrease in net assets also represents a related asset (step 2), a deferred outflow of resources (step 3), or an expense (step 4). Steps 2–4 of the recognition methodology assist in identifying the appropriate element of financial statements that should accompany the recognition of the decrease in net assets (step 1).

28. The first step in the expense recognition methodology is to determine the point in time at which a government has a decrease in net assets (in isolation from any other element that arises from the transaction). A decrease in net assets is evidenced by (a) a present obligation that is a liability, (b) the provision of resources to a counterparty before a liability arises, or (c) a combination of both pursuant to an expense transaction. Determining that a government has a decrease in net assets establishes that an expense-related transaction has occurred that requires recognition of an element of financial statements—generally, the inception of the transaction.

29. The second step in the recognition methodology is to determine whether a government has an asset (for example, a prepaid item) ¹³ related to the decrease in net assets. The Board concluded that a related asset arises if a government provides resources to its counterparty before the government has incurred a liability (in which case the resources are a prepaid item). For example, if a government pays in advance for cleaning services the government expects to receive in subsequent months, the government has a decrease in net assets that results in a related asset—a prepaid item.

30. The third step in the recognition methodology is to determine whether a decrease in net assets that does not have a related asset should result in the recognition of a deferred outflow of resources. To make that assessment, the Board proposed recognition attributes that would assist stakeholders in determining the applicability to a reporting period of outflows of resources in the scope of this project. (See the discussion of applicability to a reporting period in paragraphs 32–35 in this chapter.) As mentioned in paragraph 24, the conceptual framework includes a constraint that prohibits the recognition of deferred outflows of resources unless authoritative pronouncements provide for recognition of that element.

31. The fourth step in the recognition methodology provides for the recognition of expense as a result of the prior steps; that is, a decrease in net assets has been identified that does not have a related asset and is not applicable to a future period. Consequently, the government would recognize the decrease in net assets as an expense. Proposals related to application guidance for expense recognition are presented in Chapter 5.

32. The recognition methodology for both revenues and expenses described in the previous sections requires the consideration of an inflow’s or an outflow’s applicability to a reporting period to assess whether it should be recognized as a deferred inflow of resources or a deferred outflow of resources (step 3 in paragraphs 24 and 30, respectively). In order to develop principles-based guidance for step 3, the Board considered the appropriate level of prescriptiveness of the guidance to be able to develop the revenue and expense recognition model. In other words, the Board considered the level of guidance necessary to both retain the aforementioned conceptual constraint and provide effective guidance for transactions in the scope of this project without creating a finite list of transactions requiring deferral recognition. For transactions in the scope of this project, the Board believes it is possible to identify recognition attributes that would allow stakeholders to determine whether an increase or decrease in net assets is applicable to a future reporting period.

33. The Board’s preliminary view is that for Category A revenue and expense transactions, in applying the hierarchy of recognition, the attribute that establishes applicability to a reporting period is the satisfaction of a performance obligation in that period. The Board’s preliminary view is that for Category B revenue and expense transactions, in applying the hierarchy of recognition, the attribute that establishes applicability to a reporting period is compliance with time requirements in that period. The Board acknowledges that for transactions outside the scope of this project, those recognition attributes do not adequately describe the circumstances in which existing guidance requires the recognition of deferred inflows of resources and deferred outflows of resources. Therefore, the Board noted that those attributes are limited to transactions in the scope of this project. Moreover, this preliminary view should not be analogized to transactions outside the scope of this project.

34. A practical consequence of the preliminary view expressed in paragraph 33 is that Category A revenue and expense transactions in the scope of this project would not result in the recognition of deferred inflows of resources or deferred outflows of resources (even in governmental funds because, as explained in Chapter 7, the Board has proposed to no longer consider the period of availability in the Recognition Concepts Exposure Draft). Another practical consequence is that Category B transactions would include the recognition of both deferred inflows of resources and deferred outflows of resources for circumstances in which a transaction includes a time requirement that has not been met.

35. In reaching those conclusions, the Board considered relevant conceptual framework guidance, which establishes that “. . . financial reporting should help users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided.” ¹⁴ The Board concluded that proposing two recognition attributes to describe a transaction’s applicability to a reporting period would assist stakeholders in presenting information in resource flows statements consistently from period to period. In turn, the transactions would be more representational of interperiod equity. It also is notable that this proposal is consistent with model assumption 1: revenues and expenses are of equal importance (paragraph 2a in this chapter). Thereby, their recognition is independent and related to their respective applicability to a reporting period. That approach avoids the subordination of one element to another for recognition purposes.

36. As already discussed in the categorization and recognition principles sections, the Board agreed to propose a performance obligation recognition methodology for Category A revenue and expense transactions. Consequently, the Board concluded that it was important to establish a structural relationship between categorization, recognition, and measurement that would produce cohesive results. The Board concluded that the relationship between the three model components is established through the unit of account, ¹⁵ which has been identified as a performance obligation only for Category A transactions.

37. A recognition unit of account identifies the level of aggregation or disaggregation at which an asset or a liability should be recognized. The Board proposes that the identification of performance obligations (that is, the identification of the recognition units of account) consists of the identification of  each distinct good or  service in a  binding arrangement. (Specific proposals to identify distinct goods or services are included in paragraphs 12–16 in both Chapters 4 and 5.) The relationship between a performance obligation, a distinct good or service, and a recognition unit of account is illustrated below.

38. The consistency between categorization, recognition, and measurement for Category A transactions is achieved through the identification of a consistent recognition unit of account— a performance obligation.

39. The categorization proposal presented in Chapter 3 results in the identification of transactions that contain at least one performance obligation as Category A. The Board concluded that the categorization methodology generally should be applied at a binding arrangement level, unless the government expects that the binding arrangement evidences both Category A and Category B transactions. Nevertheless, the categorization approach is used to identify transactions that include performance obligations, each of which is a recognition unit of account. (The relationship between binding arrangements and transactions is described in paragraph 9 in Chapter 7.)

40. Furthermore, the Board’s preliminary views expressed in Chapter 6 conclude that measurement would be applied to each performance obligation as an allocated amount.

41. The Board further elaborated on the recognition attribute of the satisfaction of a performance obligation, which establishes the recognition of revenues and expenses. The Board believes that satisfaction of a performance obligation occurs when there is a transfer of control of resources (distinct goods or services). That is, in revenue transactions, a government satisfies its performance obligation when the counterparty receives control of a resource. Conversely, in expense transactions, a counterparty satisfies its performance obligation when a government receives control of a resource. As explained in Chapters 4 and 5, the Board believes that the transfer of control of resources happens either at a point in time or over time. For that reason, the Board proposes criteria to identify the circumstances in which recognition occurs over time. The Board further proposes that recognition at a point in time occurs when none of those criteria are met.

42. The Board focused on  the transfer of control  of  a resource as  the  meaningful  point  in  time  at  which  a  performance  obligation  is   satisfied   because   it   evidences   the  point at which a party to a transaction can utilize the present service capacity and determine the nature and manner of use of the present service capacity embodied in the goods or services provided by the counterparty.

43. For this Preliminary Views, the Board considered basic measurement proposals to establish a measurement  methodology.  As discussed previously,  the  Board  proposes  a foundational measurement principle, applicable to both Category A and Category B transactions, that assets and liabilities be measured directly, and revenues and expenses be measured through their related asset or liability. Based on that measurement principle, the amount of consideration received, or receivable, would inform the amount of revenue to be recognized. Furthermore, the amount of consideration paid, or payable, would inform the amount of expense to be recognized. That approach is consistent with existing guidance and is identified in Chapter 6 as direct measurement of the most liquid item.

1. This chapter describes the Board’s preliminary views regarding the categorization of revenue and expense transactions. As described in Chapter 1, categorization is the first component in the revenue and expense recognition model and is the process of classifying a transaction by identifying the relevant characteristics of that transaction in the context of a group of similar transactions. It is important to properly determine the type of transaction primarily because assets in revenue transactions and liabilities in expense transactions arise at different times depending upon the type of transaction. Correctly categorizing a transaction allows stakeholders to follow the appropriate recognition and measurement provisions for that type of transaction.

2. The categorization methodology described in this chapter represents a fundamental shift in perspective for revenue and expense transactions. Historically, revenue and expense transactions have been categorized as exchange, exchange-like, or nonexchange depending on an assessment of equal value. As highlighted in Chapter 1, reliance on equal value produces inconsistent categorization results. The Board believes that the four-step categorization methodology based on a transaction’s underlying characteristics presented in this chapter is a robust approach for determining the type of transaction. Furthermore, this categorization methodology minimizes reliance on the amount of consideration provided in a transaction, which historically has been used to indicate the transaction type. The model requires the exercise of professional judgment, as would any model. Nevertheless, the Board expects that the new methodology would produce consistent categorization results because it reduces reliance on subjective characteristics.

3. The Board’s preliminary view is that Category A revenue and expense transactions are composed of acquisitions coupled with sacrifices or sacrifices coupled with acquisitions that are interdependent. Category B revenue and expense transactions are acquisitions without sacrifices, sacrifices without acquisitions, or acquisitions and sacrifices that are not interdependent. To apply those principles, governments would follow a four-step categorization methodology outlined as follows:

4. The following flowchart illustrates the proposed categorization methodology.

5. The Board’s preliminary view is that transactions in the scope of this project should be evidenced by a binding arrangement. A binding arrangement is an understanding between two or more parties that creates rights, obligations, or both among the parties to a transaction. A binding arrangement would include a rebuttable presumption of enforceability and have economic substance. The term binding arrangement is intended to encompass a broad spectrum of arrangements, which can be written, oral, or implied by the government’s existing practices. Examples of written arrangements include contractual agreements, such as grant agreements, memorandums of understanding, and contracts. Additionally, legislation is an example of a binding arrangement that is not contractual in nature. Examples of more informal arrangements include the creation of a new customer account for water and sewer service from a public utility, the issuance of a legally enforceable purchase order, or the purchase of a ticket for a bus ride.

6. Enforceability as described in this Preliminary Views is the ability of one or more parties in a transaction to compel other parties in the transaction to comply with the terms of a binding arrangement. In other words, the preliminary view expressed in paragraph 5 does not require that all the parties in the transaction have a means to compel compliance. For example, in property tax transactions, governments often rely on property liens to enforce tax collection; however, the taxpayer does not have the ability to enforce the binding arrangement.

7. Enforceability arises from the legal framework surrounding the binding arrangement, such as legislation, commercial code, or contract law. The preliminary view in paragraph 5 requires only the identification of a rebuttable presumption of enforceability to reflect specific challenges prevalent in the government environment. For example, states can defeat legally enforceable claims because they have sovereign powers. In other words, the preliminary view expressed in paragraph 5 does not require that governments have absolute certainty about the enforceability of a binding arrangement. Furthermore, a rebuttable presumption of enforceability conveys that even if a binding arrangement initially has been identified as enforceable, enforceability may be disproved at a later time. After an initial assessment, governments would not be required to reassess enforceability unless relevant facts and circumstances change.

8. Assessment of enforceability of a binding arrangement would not be limited to redress sought through a court of law. Although the most prevalent form of enforceability relies on court action, governments have additional mechanisms available to enforce the terms of a binding arrangement. Examples of those other enforceability mechanisms include reductions of future funding, debarment from a program, or coercive powers of sovereign governments. Another example of enforceability without the involvement of a court of law is when a public utility suspends service until a customer pays overdue bills.

9. The scope of this project also includes liabilities that arise from moral or constructive obligations. For example, state aid to school districts in cases in which the aid is not evidenced by a contractual type of binding arrangement generally cannot be enforced through the legal framework. In those cases, the transaction may include a moral or constructive obligation that the state has little or no discretion to avoid because of the potential social, moral, or economic consequences. In other words, the mechanism for enforcement for moral or constructive obligations that are liabilities is different from enforcement through legal actions, and although those transactions are not enforceable in a court of law, a government may successfully assert a rebuttable presumption of enforceability.

10. A binding arrangement should have economic substance that results in economic consequences to the parties, such that there is an expected change in the risk, amount, or timing of the government’s cash flows or there is an expected change in the government’s service potential.

11. Economic substance should not be considered equivalent to significance (a materiality measure). Certain transactions in the government environment can be considered insignificant individually but would still have economic substance. For example, individual bus fares generally are insignificant amounts; however, for a transit authority, bus fares have economic substance and have an effect on the government’s service potential.

12. If a government is unable to identify a binding arrangement with a rebuttable presumption of enforceability and economic substance, the transaction would be outside the scope of this project. Therefore, further assessment of the steps in the categorization methodology is unnecessary. The requirement that binding arrangements have economic substance and a rebuttable presumption of enforceability is intended to prevent fictitious binding arrangements from giving rise to transactions.

13. The Board’s preliminary view is that Category A transactions should be evidenced by mutual assent between parties of capacity. The identification of mutual assent would require that a government determine that all parties to the transaction have approved the terms and conditions of the binding arrangement. Furthermore, when the parties approve the terms and conditions of the binding arrangement, those parties should have the ability to bind themselves or their entity.

14. The requirement that all parties to the transaction approve the terms and conditions of the binding arrangement assists in identifying compulsory transactions, which are identified as Category B. For example, sales tax transactions do not require mutual assent, even in circumstances in which the sales tax is subject to a voter referendum. Although a voter referendum process is a consultation with the citizenry, such a consultation does not evidence the approval of all parties to the binding arrangement. Furthermore, a citizen’s willingness to pay a tax does not evidence mutual assent because the citizen does not have the ability to approve the terms of the binding arrangement. Conversely, a person who wishes to access public transportation is approving the terms and conditions of a monthly bus pass binding arrangement by entering into the transaction to purchase the bus pass from the local transportation authority.

15. There are circumstances in which it is challenging to determine whether a transaction includes mutual assent. Consider a transaction in which one government transfers resources to another government based on a legislative binding arrangement, for example, the sharing of sales tax revenue. In that transaction, it is difficult to argue that the recipient government approves the terms of the binding arrangement because the transaction is mandated by legislative action. Historically, some have argued that such a transaction is voluntary because it lacks purpose restrictions. However, voluntary transactions are not equivalent to transactions that include mutual assent. In general, binding arrangements based on legislation are considered to lack mutual assent because the legislative body of the government providing the resources unilaterally establishes the terms of the transaction. (As previously mentioned, public consultation does not evidence mutual assent.) Conversely, contractual binding arrangements usually include mutual assent because the parties to the transaction are required to approve the terms and conditions of the contract.

16. For a mutual assent assertion to be supported, the parties that approve the terms and conditions of a binding arrangement would have the capacity to bind themselves or the entity they represent. For example, if the governing body of a city authorizes the city manager as the only party that can sign contracts on behalf of the city, the city manager is the only party of capacity in that government. Any contracts signed by other city employees would not be enforceable and, therefore, would be outside the scope of this project. The lack of capacity of one of the parties could be used to rebut the presumption of enforceability of that binding arrangement at any point in the transaction.

17. If a government concludes that a transaction lacks mutual assent between parties of capacity, the transaction would be identified as Category B. If the capacity of the parties is questioned later, the presumption of enforceability could be rebutted. If the transaction is no longer presumed to be enforceable, the transaction is outside the scope of this project.

18. The Board’s preliminary view is that Category A transactions should include substantive rights and obligations. The identification of the rights and obligations of each party requires that the government assess the terms and conditions in the binding arrangement to determine whether they represent both substantive rights and substantive obligations.

19. In some revenue transactions, a government’s obligations would require the provision of goods or services to a counterparty, and the government’s rights would require the right to receive consideration for the provision of those goods or services. Other revenue transactions include only rights, for example, the right to receive consideration from a donor’s pledge that is verifiable and measurable and the pledge does not impose an obligation on the government. In some expense transactions, a government’s right would entail the right to receive goods or services from the counterparty, and the government’s obligation would require the provision of consideration for those goods or services.

20. It is possible to identify other transactions in which either rights or obligations are present but not both. For example, consider an agreement between a city and a not-for-profit entity for a payment-in-lieu-of-taxes (PILOT), in which the city does not commit to providing specific or additional services to the not-for-profit entity. The transaction includes the city’s right to receive resources from the not-for-profit entity without any additional obligations. Conversely, other PILOT agreements could stipulate that a city provide additional police and fire protection services to a not-for-profit, and that circumstance would result in a different conclusion.

21. The evaluation of the rights and obligations in a transaction also requires the assessment of whether those rights and obligations are substantive in relation to each other. For example, a government may enter into a donation arrangement in which it agrees to receive a contribution of $100,000 and commits to providing lapel pins (which is de minimis in relation to the resources provided) to various members of the donor’s organization. The obligation to provide lapel pins is not substantive in relation to the right to receive the contribution. In that circumstance, the government has a substantive right to receive resources but does not have a substantive obligation to provide resources. Therefore, that revenue transaction would not include substantive rights and obligations.

22. Determining whether the rights and obligations in a binding arrangement are substantive requires professional judgment. That assessment should be based on the facts and circumstances of each transaction. For example, a bus fare generally is substantive in the context of the obligation to provide transit services. (See paragraph 11 in this chapter.)

23. If a government concludes that a transaction has only rights or only obligations, the transaction would be identified as Category B. If a government concludes that the transaction has both rights and obligations but neither the rights nor the obligations are substantive, the transaction also would be identified as Category B.

24. The Board’s preliminary view is that Category A transactions should include substantive rights and obligations that are interdependent. Interdependent rights and obligations in Category A transactions are linked, such that the rights are dependent on the obligations, and the obligations are dependent on the rights. If a government concludes that the rights and obligations in a binding arrangement are interdependent, the obligations would represent performance obligations, and the rights would represent the right to consideration for that performance. As a result of affirmatively answering all four steps, the transaction in the assessed binding arrangement would be identified as Category A.

25. The overall determination that the rights and obligations in a binding arrangement are interdependent allows the government to conclude that if it satisfies a performance obligation (further discussed in Chapter 4), that government has the right to receive consideration for that performance. Conversely, if the government’s counterparty satisfies a performance obligation due to the government (further discussed in Chapter 5), that government has an obligation to provide consideration to the counterparty.

26. The assessment of interdependence between rights and obligations is relevant in considering the categorization of grants in general. As discussed in the subsection below, expenditure-driven ¹⁶  categories, based on the differences between their respective rights and obligations. That is, expenditure-driven grants include interdependent rights and obligations, and purpose- restricted grants include rights and obligations that are not interdependent.

27. If a government concludes that a transaction has substantive rights and substantive obligations but those rights and obligations are not interdependent, the transaction would be identified as Category B.

28. The 2015 PIR mentioned in paragraph 6 in Chapter 1 identified a challenge in existing guidance: some stakeholders have difficulty differentiating between expenditure-driven grants and purpose-restricted grants. Expenditure-driven grants are those in which the grantor commits to the provision of resources to a recipient government dependent on that government providing goods or services (including the construction of capital assets) specified in a grant agreement. The nature of those grants is different from grants in which the grantor commits to the provision of resources to a government with only a requirement that the use of the resources be restricted to a specific purpose; in this instance, the provision of resources is not dependent on the recipient government’s provision of goods or services. Those grants are referred to in this document as purpose-restricted grants. (Purpose restrictions are discussed further in Chapter 4.) The difference in the nature of the resources provided in expenditure-driven grants and purpose-restricted grants is the interdependence between rights and obligations present in expenditure-driven grants and the absence of interdependence in purpose-restricted grants.

29. Pursuant to the categorization methodology presented in this chapter, expenditure-driven grants would be Category A transactions. For example, consider a transit authority receiving resources to provide certain services for the elderly:

30. Contrast that conclusion with purpose-restricted grants. (Case 13 in Appendix C illustrates purpose-restricted donations.) Similar analysis can be made in steps 1–3 of the categorization methodology. However, challenges arise when assessing the fourth step. Although it is possible to argue that the grantee would have the right to receive consideration and the obligation to comply with the purpose restrictions, and that the grantor has the obligation to provide resources to the grantee and the right to enforce the purpose restrictions established in the transaction, the transaction fails the fourth step because the rights and the obligations are not interdependent. The grantor’s provision of resources is not dependent on the grantee’s provision of goods or services to the elderly. Rather, the grantor has restricted the manner in which the resources can be used. Therefore, purpose-restricted grants would be identified as Category B transactions.

31. Some stakeholders expressed interest in removing the difference between expenditure- driven grants and purpose-restricted grants and suggested similar recognition provisions for both types of transactions. The Board considered that approach but rejected it because the transactions have different characteristics (interdependence of rights and obligations) and, therefore, revenue (and expense) recognition should be reflective of that difference. If a similar recognition approach were considered for purpose-restricted grants and expenditure-driven grants, it would require either (a) the recognition of revenue for purpose-restricted grants when outflows for the restricted purpose are incurred or (b) the recognition of revenue for expenditure-driven grants at the inception of the grant agreement. The Board does not believe that either alternative is representative of those types of transactions.

32. The Board’s preliminary view is that the categorization methodology generally should be applied at the binding arrangement level even if a single binding arrangement evidences multiple transactions. For example, property taxes are imposed by a governing body with a single binding arrangement. However, the tax imposed on each individual taxpayer is a separate transaction. In that circumstance, it is reasonable to apply the categorization methodology to the binding arrangement and not to each transaction. However, in circumstances in which a government expects to have both Category A and Category B transactions evidenced by a single binding arrangement, the categorization methodology should be applied at the transaction level.

33. It is possible that the terms and conditions of a binding arrangement may be modified at any time during the term of the arrangement. Governments would reassess the categorization of the transaction only if there is a significant change in the rights or obligations included within the binding arrangement. For example, if a government has a Category A expense transaction for the purchase of supplies other than inventory and the government and its counterparty agree to an increase in quantity along with a corresponding change in the amount of consideration, the transaction’s categorization would not be reassessed. On the other hand, if a government has a Category B revenue transaction, such as a donation, in which the government’s obligations initially are not substantive but later the government’s counterparty requires the government to perform a service associated with the donation (a substantive obligation), that change could affect the categorization of the transaction and, therefore, the government would reassess categorization.

34. The Board’s preliminary view is that categorization may be assessed on a portfolio basis for groups of binding arrangements that have similar characteristics if the government reasonably expects that the results of applying a portfolio approach would not differ from the results of categorizing the individual binding arrangements. Identifying the similarities of characteristics in binding arrangements to create a portfolio requires the exercise of professional judgment.

35. The categorization methodology presented in this chapter effectively removes from the scope of this project revenue and expense transactions that are invalid, illegal, fraudulent, or fictitious. In addition to that scope exclusion, the Board considered and rejected the removal from the scope of this project revenue transactions for which the collectibility threshold is low; for example, below reasonably assured as defined in existing guidance. ¹⁷ Governments are motivated by their public-purpose mission (as opposed to a profit motive) and in many cases provide public services regardless of collectibility. That environmental difference led the Board to conclude that a collectibility threshold should not be applied in the categorization component of the model and that transactions with low collectibility thresholds should remain within the scope of this project.

36. As a result, the Board’s preliminary view is that revenue recognition guidance for transactions in which collectibility is not reasonably assured should be removed from the existing literature. That is, the guidance for the installment method and the cost recovery method should not be carried forward.

37. As discussed in Chapter 1, the expected benefit of the categorization methodology is consistency in its application to a wide range of revenue and expense transactions. The categorization methodology focuses on the characteristics of a transaction and not on the subjective judgments of the parties to the transaction. Therefore, the categorization methodology represents a fundamental shift in the manner in which governmental revenue and expense transactions are classified.

38. Given that fundamental shift, the Board believes that it is not appropriate to assume that exchange transactions are equivalent to Category A transactions and nonexchange transactions are equivalent to Category B transactions. As shown in the examples below, several transactions do align in that way between the two methodologies. However, it is necessary to assess categorization independently from the historic notions of value and exchange in order to prevent an incorrect classification of transactions that do not include performance obligations as Category A, or transactions that include performance obligations as Category B.

39. The Board believes that an expected outcome of the categorization methodology is the enhancement of comparability among governments and an improvement in the quality of information in financial statements as a result of reporting revenues and expenses in the appropriate periods. The Board expects that relying on the underlying characteristics of a transaction for categorization would enhance comparability among governments because two governments with similar transactions should arrive at the same categorization conclusions. Comparability is desirable in financial reporting, as stated in paragraph 68 of Concepts Statement 1: “Comparability implies that differences between financial reports should be due to substantive differences in the underlying transactions or the governmental structure rather than due to selection of different alternatives in accounting procedures or practices.” The Board’s preliminary views related to classification reduce the potential for differences in financial reports that are not due to substantive differences in the underlying transactions. Therefore, the Board believes that the financial information that ultimately results from the categorization methodology will have enhanced understandability and relevance to the users of that information.

40. The chart below identifies certain types of revenue and expense transactions that are prevalent in governments as Category A or Category B. It should be noted that nomenclature may differ among governments, which may pose a risk in relying on these labels. Each government should make its own assessments to determine whether the facts and circumstances of that government’s transactions align with the conclusions provided below.

1. This chapter describes the Board’s preliminary views for revenue recognition arising from Category A and Category B transactions. As described in Chapter 1, recognition is the second component in the revenue and expense recognition model and is the process of determining when an item should be reported as an element of financial statements. This chapter presents the Board’s preliminary views about revenue recognition in financial statements presented applying the economic resources measurement focus and accrual basis of accounting. Revenue recognition in financial statements presented applying the short-term financial resources measurement focus and accrual basis of accounting is discussed in Chapter 7.

2. As explained in Chapter 2, the methodology used by the Board to analyze revenue recognition is the same for both Category A and Category B transactions. As a result, certain preliminary views of the Board are expressed as being applicable to both categories of revenue transactions, such as the recognition of a liability for resources received before an enforceable legal claim arises. Preliminary views related to recognition application in this chapter are identified separately for Category A and Category B transactions. Several of the recognition proposals related to Category B revenue transactions affirm existing guidance. ¹⁸ For that reason, those provisions are not expressed as preliminary views of the Board. The preliminary views presented in bold are proposed changes to existing literature.

3. The revenue recognition proposals included in this chapter and the expense recognition proposals included in Chapter 5 are symmetrical as a result of relying on model assumption 4. (See paragraphs 2d and 9 in Chapter 2.)

4. The Board’s preliminary view is that a receivable should be recognized when a legally enforceable claim arises in a revenue transaction. A legally enforceable claim arises at different points based on the terms and conditions specified in the binding arrangement. Specific proposals for when a legally enforceable claim arises for Category A and Category B revenue transactions are included in each subsection below.

5. The Board’s preliminary view is that advances in revenue transactions are resources received before a legally enforceable claim arises and should result in a liability being recognized, regardless of whether those advances are refundable.

6. The Board’s preliminary view is that the performance obligation recognition approach should be used to recognize Category A revenue transactions. The Board’s preliminary view also conveys that the earnings recognition approach as described in paragraph  23  of  Statement  No.  62,  Codification  of  Accounting  and  Financial ReportingGuidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, would not be continued.

7. The Board’s preliminary view is that receivables from Category A revenue transactions should be recognized when (or as) a government satisfies its performance obligation(s)—that is, when a legally enforceable claim to consideration arises. (See paragraph 22 in Chapter 2.) The Board concluded that when (or as) a government satisfies its performance obligation(s), the government has control of the present service capacity of a resource (a receivable). Consistent with this preliminary view, the Board concluded that payment terms established in a binding arrangement, on their own, do not establish control of the present service capacity of a resource and, thus, do not give rise to a receivable. For example, if a government requires prepayment for a service as a condition of providing that service, the expectation of that advance does not represent a receivable. (See Case 7 in Appendix C.)

8. As expressed in paragraph 5 in this chapter, resources received prior to a government’s satisfaction of its performance obligation(s) represent an advance and would be recognized as a liability. (See paragraph 23 in Chapter 2.) The Board believes that performance obligations become present obligations only in circumstances in which the government receives resources prior to its performance. In those circumstances, a government would have an increase in net assets that would result in a related present obligation to perform that it would have little or no discretion to avoid. Accordingly, a liability would be recognized.

9. Based on the preliminary view in paragraph 7, the Board concluded that, absent advances, performance obligations are not liabilities. The Board agreed that the execution of a Category A binding arrangement would not give rise to a receivable for the right to receive consideration, nor a liability for the performance obligation. In other words, even though signing a contract may obligate a government to perform, that obligation would not be a present obligation and, therefore, would not be a liability. In reaching that decision, the Board has retained its conclusion that executory contracts do not give rise to the recognition of elements of financial statements.

10. The Board’s preliminary view is that in Category A revenue transactions, the satisfaction of a performance obligation in a reporting period establishes that an inflow of resources is applicable to that reporting period. (See paragraph 24 in Chapter 2.) For that reason, the Board concluded that deferred inflows of resources should not be recognized in Category A revenue transactions in the scope of this project. The Board acknowledges that for transactions outside the scope of this project, this recognition attribute does not adequately describe the circumstances in which existing guidance requires the recognition of deferred inflows of resources and deferred outflows of resources. Therefore, the Board noted that this recognition attribute is limited to transactions in the scope of this project. Moreover, this preliminary view should not be analogized to transactions outside the scope of this project. (See paragraph 33 in Chapter 2.)

11. The Board’s preliminary view is that revenue in Category A transactions should be recognized when (or as) a government satisfies its performance obligation(s) at a point in time or over time. (See paragraph 25 in Chapter 2.) In paragraphs 12–16 in this chapter, the Board proposed guidance to identify each performance obligation in Category A binding arrangements. The recognition of revenue would be based on the satisfaction of those performance obligations. The Board’s preliminary view is that the satisfaction of a performance obligation occurs when a government transfers control of a resource to its counterparty or a third party. (See also paragraphs 41 and 42 in Chapter 2.) Therefore, revenue recognition should reflect that transfer of control of a resource. In paragraphs 17 and 18 in this chapter, the Board proposed criteria to identify circumstances in which revenue would be recognized (a) over time or (b) at a point in time.

12. The Board’s preliminary view is that each distinct good or service identifiable in a Category A revenue binding arrangement represents a performance obligation.

13. A good or service is distinct if (a) the counterparty can obtain the service capacity of the good or service either on its own or together with other resources that are readily available to the counterparty (that is, the good or service is capable of being distinct) and (b) the government’s obligation to transfer the good or service to the counterparty is separately identifiable from other obligations in the binding arrangement (that is, the obligation to transfer the good or service is distinct within the context of the binding arrangement). An example of a distinct good is a book in a university bookstore. An example of a distinct service is the provision of a bus ride by a transit authority.

14. If a good or service in a binding arrangement is not distinct, a government would combine that good or service with other goods or services in the binding arrangement until together they comprise a bundle of goods or services that is distinct. In some cases, that would result in a government accounting for all of the goods or services in a binding arrangement as a single performance obligation. For example, a knee replacement surgery is performed at a healthcare entity. In the provision of that service, the healthcare entity can identify a multitude of goods or services it transfers to the patient, including hospital residence, surgeon services, and the provision of medication. However, none of those goods or services, individually, would satisfy the government’s obligation to the patient who requires the knee replacement. Consequently, the healthcare entity would combine (or bundle) those identifiable goods or services into a single performance obligation capable of providing a distinct service to the patient.

15. Certain goods or services are provided in a series that also can be distinct. A series of goods or services is distinct if it has the same pattern of transfer to the counterparty and the goods or services within the series are received and consumed simultaneously. For example, units of water or electricity would be considered distinct goods or services provided in a series by a city utility department.

16. As explained in Chapter 2, the distinctness of a good or service in a revenue transaction should be assessed from the perspective of a government’s counterparty and in the context of the binding arrangement. The Board believes that assessment, which may require significant professional judgment, does not imply that governments should identify the counterparty’s intended use of the goods or services promised in the binding arrangement. Rather, the proposal conveys that the assessment of distinct goods or services should be based on the characteristics of those goods or services in the context of a specific binding arrangement, with a reasonable understanding of how the counterparty may obtain service capacity from those goods or services. (Cases in Appendix C for Category A revenue transactions identify examples of distinct goods or services.)

17. The Board’s preliminary view is that each performance obligation is satisfied either at a point in time or over time. The distinction between recognition at a point in time and recognition over time relies on the identification of when a government transfers control of a resource (a distinct good or service) to the counterparty.

18. Control of a resource means that a party is able to direct the use and employment of the present service capacity of that resource. Category A revenue transactions should be recognized over time if any of the three criteria shown below is met because these criteria evidence the transfer of control of a resource over time:

If a Category A revenue transaction does not meet any of the three criteria above, revenue should be recognized at the point in time at which the government transfers control of the resource to the counterparty.

19. As explained in Chapter 3, the Board believes that expenditure-driven grants should be identified as Category A transactions. Therefore, revenue recognition proposals for Category A transactions would be applicable. Expenditure-driven grants are those in which the resource provider commits to the provision of resources to a government dependent on that government providing goods or services (including the construction of capital assets) specified in a grant agreement. Those grants are different in nature from grants in which the grantor commits to the provision of resources to a government with only the requirement that the use of the resources be restricted to a specific purpose, and the provision of resources is not dependent on the recipient government’s provision of goods or services. Grants that restrict the use of resources to specific purposes are referred to in this document as purpose-restricted grants and are identified as Category B transactions.

20. The Board agreed to propose that for expenditure-driven grants, a receivable should be recognized when the grantee government has incurred allowable costs pursuant to the relevant eligibility requirements established by an executed grant agreement. The Board believes that is the point in time at which a legally enforceable claim arises for the grantee government and that the incurrence of allowable costs evidences the satisfaction of its performance obligation(s). Consistent with its preliminary view expressed in paragraph 5 in this chapter, the Board believes that resources received before the government has incurred allowable costs should be recognized as liabilities.

21. The Board further concluded that for Category A grants, revenue should be recognized as each dollar of allowable costs is incurred in compliance with the relevant grant requirements. That practical approach would not require grantors and grantees to identify each distinct good or service provided in a grant agreement, which in some circumstances, could be challenging (for example, in block grant programs). However, the Board noted that this approach should not be construed to mean that each dollar constitutes a single transaction or that the incurrence of an allowable cost is, in and of itself, the satisfaction of a performance obligation.

22. The Board’s preliminary view is that the assessment of future compliance with expenditure-driven grant requirements should not be taken into consideration for recognition purposes. For example, a city provides monetary resources in the form of a 30- year loan to an economic development authority to purchase a building. The terms of the loan require that the economic development authority use the building for economic development activities for a period of 30 years but do not require any loan payments during that period. If the economic development authority complies with the requirement for the use of the building for the specified period, the city would forgive the loan at the end of the 30-year period; otherwise, the amount of the loan becomes due at any point in time at which it is determined that the economic development authority has not used the building for economic development activities. Based on the Board’s proposal, the city would recognize a loan receivable and the economic development authority would recognize a loan payable in their respective financial statements for the period of the loan. In year 30, assuming compliance, the city would recognize an outflow of resources for the loan forgiveness, and the economic development authority would recognize an inflow of resources. The city also would consider collectibility issues that may arise from this transaction. (See Case 3 in Appendix C.)

23. This preliminary view is not intended to convey that the Board is proposing a higher level of assurance for the assessment of allowable costs. Rather, it conveys the Board’s decision not to include probability of future grant compliance as an attribute for revenue recognition. Furthermore, that decision of the Board should not preclude reliance on estimates to recognize the amount of allowable costs incurred pursuant to an executed binding arrangement.

24. As mentioned in paragraph 2 in this chapter, the Board relied on existing literature to develop revenue recognition for Category B transactions. Consistent with paragraph 4, the Board believes that a receivable from a Category B revenue transaction should be recognized when a legally enforceable claim arises, which is specifically identified in each of the five subcategories discussed in paragraphs 28–51 in this chapter.

25. As expressed in paragraph 5 in this chapter, the Board believes that resources received prior to the establishment of a legally enforceable claim in a Category B revenue transaction should be recognized as a liability. Specifically, the Board believes that resources received before the government has a legally enforceable claim represent a present obligation to sacrifice resources and, therefore, would result in a liability being recognized. This would be the case regardless of whether the resources are refundable.

26. The Board’s preliminary view is that in Category B revenue transactions, the attribute that establishes that an inflow of resources is applicable to a reporting period is compliance with time requirements in that period. For that reason, the Board concluded that deferred inflows of resources would be recognized in Category B revenue transactions in circumstances in which a government has recognized an asset, the inflow of resources is subject to time requirements, and compliance with those time requirements has not been achieved. “Time requirements specify the period or periods when resources are required to be used or when use may begin. (For example, a provider may stipulate that the resources it provides are to be disbursed during a specific fiscal year or over a specified number of years, or cannot be disbursed until after a certain date or event has occurred, if ever.)” ¹⁹ The Board acknowledges that for transactions outside the scope of this project, this recognition attribute does not adequately describe the circumstances in which existing guidance requires the recognition of deferred inflows of resources and deferred outflows of resources. Therefore, the Board noted that this recognition attribute is limited to transactions in the scope of this project. Moreover, this preliminary view should not be analogized to transactions outside the scope of this project. (See paragraph 33 in Chapter 2.)

27. The Board’s preliminary view is that revenue that arises from Category B transactions should be recognized based on compliance with time requirements. Absent time requirements, Category B revenue should be recognized when a legally enforceable claim arises.

28. Derived Category B revenue transactions result from assessments imposed by a government on underlying Category A transactions. The following examples identified in existing standards would be derived Category B revenue transactions: taxes on personal income, taxes on corporate income, and taxes on retail sales of goods or services. The Board agreed that the following also are derived Category B revenue transactions: fees imposed for capital and infrastructure renewal, repairs, or expansions, such as passenger facility charges and impact fees. (See Case 9 in Appendix C.)

29. The Board concluded that the existing standards that require the recognition of a receivable when the underlying transaction or activity on which the tax or fee is imposed occurs should be applied to derived Category B revenues. That is the point in time at which a legally enforceable claim arises. Resources received before the underlying transaction or activity takes place should be recognized as a liability. Revenue also should be recognized when a legally enforceable claim arises. (The Board is not aware of the existence of derived Category B revenues that are subject to time requirements.)

30. Imposed Category B revenue transactions result from assessments by governments on nongovernmental entities, including individuals, for actions committed or omitted by those entities. Existing literature identifies the following examples that would be considered imposed Category B revenue transactions: property taxes (ad valorem); fines and penalties; and property forfeitures, such as seizures and escheats. The Board agreed that regulatory fees also are imposed Category B revenue transactions, for example, driver’s licenses, professional licenses, and building permits. (See paragraphs 34–36 in this chapter.)

31. The Board’s preliminary view is that receivables should be recognized for imposed Category B property taxes at the imposition date. The imposition date is when a governing body approves a local ordinance or similar legal action that specifies the property tax rate or total property tax amount that citizens are expected to provide for a specific fiscal period. The Board concluded that the point in time at which the government imposes the tax is when a legally enforceable claim arises.

32. Existing literature describes the asset recognition date for property taxes using various terms such as lien and assessment. The Board believes that legislatures in different states may use those terms to mean different events in the property tax cycle and, for that reason, concluded that those terms should not be used as the basis for recognition. For example, the lien date is the point in time at which legislation prescribes that a priority claim of the imposing government to the taxpayer’s property attaches to that property. The identification of a lien date is necessary for enforcement purposes. In some states, liens attach prior to the imposition of property taxes; however, the amount of the tax has not been established at that point. Furthermore, the assessment date in certain states is the date on which the tax assessor identifies the properties subject to taxation and determines their appropriate appraisal amounts for taxation purposes. The Board concluded that neither of those dates represent the point in time at which the government has a legally enforceable claim to resources that should be recognized as a receivable. Again, the Board agreed not to use the terminology employed in existing literature. The Board instead relied on the date on which a governing body takes action to (a) impose a property tax rate or (b) identify the total amount of property tax that is apportioned to specific property owners as the point in time at which the government has a legally enforceable claim. The Board believes that at the imposition date, the government has control of the present service capacity of a resource, and, therefore, a receivable should be recognized regardless of whether a lien has attached to the property.

33. The Board decided that a liability should be recognized when a government receives resources prior to the imposition date. The Board affirmed that property taxes are subject to time requirements, which are established by the governing body by stipulating the period to which those property taxes apply. Therefore, assets recognized at the imposition date but before the period for which they are imposed should be recognized as deferred inflows of resources. Revenue should be recognized in the period for which the taxes are imposed.

34. The Board’s preliminary view is that receivables for regulatory fees should be recognized when the individual or entity engages in, or applies for a permit to engage in, the activity upon which the government has imposed a fee. The Board’s preliminary view is that receivables for punitive fees should be recognized when, pursuant to the due process of the law, it can be established that an individual or entity has committed or omitted an act that is a violation of a law for which a punitive fee is prescribed by the governing body’s legislation.

35. Regulatory fees are imposed by a government with the intent to control, oversee, or restrict an activity. States generally engage in oversight of certain professions such as engineering, nursing, and accounting. States further restrict certain activities, such as driving, to qualified individuals. Counties commonly require registrations of pets or permits for hunting and fishing. Cities generally regulate construction through zoning and building permits. Punitive fees are imposed by a government to penalize those guilty of infractions of laws, local ordinances, or their equivalents. Examples include traffic violations and civil fines for false emergency calls.

36. The Board affirmed the existing requirement that a receivable and revenue be recognized for regulatory and punitive fees when a legally enforceable claim arises. (See Cases 11 and 16 in Appendix C.) The Board concluded that regulatory fees could be subject to time requirements in circumstances in which the government imposes license fees that are applicable to more than one fiscal period. In those cases, a deferred inflow of resources should be recognized for amounts applicable to a future period. (See paragraph 33 in this chapter.)

37. The Board’s preliminary view is that Category B transactions include a subcategory identified as contractual binding arrangement transactions, in which two or more willing parties enter into an agreement evidenced by an explicit binding arrangement that provides for the transfer of resources between the parties. Contractual binding arrangement transactions can be both revenue and expense transactions. (Expense transactions are discussed in Chapter 5.) Examples of contractual binding arrangement transactions include donation agreements, pledges, perpetual trusts, PILOTs from not-for-profit entities, and purpose- restricted grants that are evidenced by a grant agreement.

38. It is relevant to point out that existing literature identifies most of those transactions as voluntary nonexchange transactions. However, it previously was noted that distinguishing between voluntary and government-mandated nonexchange transactions may not be relevant because the distinction in existing literature primarily is based on the existence of purpose restrictions, which do not inform recognition.

39. Existing guidance generally identifies grants as voluntary nonexchange transactions, regardless of whether those grants are subject to purpose restrictions or eligibility requirements. ²⁰ As explained in paragraph 19 in this chapter, the Board proposes categorizing expenditure-driven grants as Category A transactions and purpose-restricted grants as Category B transactions.

Furthermore, the Board evaluated eligibility requirements, in general, and concluded that the required characteristics of recipients ²¹ does not inform recognition and, for that reason, decided not to rely on it as a recognition attribute. The Board concluded that time requirements ²² should be considered a recognition attribute for determining applicability to a reporting period and proposes that it be employed to distinguish between the recognition of deferred inflows of resources and revenue. Reimbursements ²³ are incorporated as part of Category A grant recognition. Contingencies ²⁴ are considered in contractual binding arrangement transactions. Eligibility requirements have been disaggregated into specific recognition attributes. The proposals included in this section are relevant only for revenue transactions that may be subject to purpose restrictions, such as donations, pledges, and certain PILOTs.

41. It is not unusual for governments to receive Category B revenues that are purpose restricted. Purpose restrictions are constraints imposed by a resource provider on the types of activities or programs for which resources can be deployed in the provision of a service. Some purpose restrictions are narrow, such as for staff training, whereas others are broad, such as for the provision of public safety services. Regardless of the specificity of the restriction, the Board continues to believe (as it concluded in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, as amended) that a purpose restriction does not represent an appropriate recognition attribute. Therefore, resources received that are subject only to purpose restrictions should not be recognized as liabilities because those resources do not represent a present obligation to sacrifice resources. In such a circumstance, the government has received an inflow of resources that was not dependent on the government’s satisfaction of a performance obligation such as the provision of distinct goods or services. Also, if that inflow of resources does not include a time requirement, the resources should be recognized as revenue. However, if the inflow of resources is subject to a time requirement, a deferred inflow of resources should be recognized until the applicable period in which compliance with the time requirement is met.

42. As indicated in paragraph 52 in this chapter, the Board believes that a contravention of purpose restrictions may require the recognition of a liability (a present obligation to return resources to a resource provider). Nevertheless, the Board believes that the enforceability of purpose restrictions represents neither a performance obligation nor a present obligation. Therefore, the enforceability of a purpose restriction does not give rise to a liability unless there is a contravention of that purpose restriction.

43.The Board’s preliminary view is that a receivable should be recognized for a pledge when a promise is made that is verifiable, measurable, and probable of collection, regardless of whether the pledge includes a time requirement (for example, for endowments). Additionally, the Board’s preliminary view is that for a pledge that requires the recipient government to raise additional contributions, a receivable should be recognized when the recipient government has met those requirements. The Board believes that time requirements should not affect asset recognition because the definition of assets does not include a time aspect. For that reason, the Board concluded that all pledges should be recognized as a receivable if the promise is verifiable, measurable, and probable of collection. Furthermore, the Board believes that for a pledge that includes specific requirements (for example, to raise an equal amount of resources), a receivable should be recognized when the government has met those requirements.

44. The Board’s preliminary view is that if a pledge includes time requirements, such as a pledge for an endowment, the government should recognize a deferred inflow of resources until the government begins to comply with those requirements by holding, investing, and preserving those resources for the specified purposes. The Board affirmed that a pledge that does not include time requirements or additional requirements as noted in paragraph 43 should be recognized as revenue at the same time a receivable is recognized.

45. The Board affirmed that receivables should be recognized for other contractual binding arrangement revenue transactions based on the terms and provisions of the binding arrangement. If resources are received before a legally enforceable claim has been established (an advance), those resources should be recognized as liabilities. If contractual binding arrangement revenue transactions include time requirements, a government should recognize deferred inflows of resources until the government begins to comply with those requirements. If contractual binding arrangement revenue transactions do not include time requirements, revenue should be recognized at the same time as the receivable.

46. The Board’s preliminary view is that Category B transactions include a subcategory identified as general aid to governments transactions, in which legislation or similar law requires the provision of resources from one government to other governments to fund a specific activity or program. In those circumstances, the resource provider appropriates resources on a periodic basis (annual or biennial) and distributes those resources to other governments based on specified formulas. The binding arrangement in that transaction is the legislation or similar law. An example of those transactions is state aid to school districts. (See Case 8 in Appendix C.) General aid to governments transactions can be either revenue or expense transactions, depending on whether the government is the resource recipient or the resource provider. (Expense transactions are discussed in Chapter 5.)

47. The Board’s preliminary view is that for general aid to governments transactions, the resource recipient should recognize a receivable when payments are due, if both of the following criteria are met:

48. The Board’s preliminary view is that in circumstances in which the resource provider cancels its appropriation and communicates the cancellation to the resource recipient, the resource recipient should continue reporting a receivable and revenue if the resource provider expresses its intent to provide the payment in a subsequent period. That preliminary view effectively is an exception to the recognition criterion in paragraph 47a. The Board’s preliminary view is that in circumstances in which the resource provider cancels its appropriation and communicates the cancellation to the resource recipient, the resource recipient should not report a receivable or revenue if the resource provider expresses its intent not to provide the cancelled payment in a subsequent period. It should be noted that these preliminary views are reflective of content included in the (nonauthoritative) Basis for Conclusions section of Statement 33.

49. The Board’s preliminary view is that Category B transactions include a subcategory identified as shared revenue transactions, in which a government (generally a state) shares a proportion of a specific revenue with other governments (generally local governments in the state’s jurisdiction). The resource provider has two transactions: (a) the imposition of revenue and (b) the sharing of that revenue with another government. The binding arrangement in this transaction would be the legislation or ordinance. Shared revenue transactions can be both revenue and expense transactions. (Expense transactions are discussed in Chapter 5.) An example of shared revenue is a state government sharing a proportion of its sales tax with the cities and counties in its jurisdiction.

50. Shared revenue transactions can be supported by two different types of appropriations, periodic appropriations and continuing appropriations. ²⁵ The Board’s preliminary view is that for shared revenue transactions that are supported through periodic appropriations, revenue should be recognized by the resource recipient following the same proposals as those for general aid to governments. (See paragraphs 47 and 48 in this chapter.)

51. The Board’s preliminary view is that for shared revenue transactions that are based on continuing appropriations, the resource recipient should recognize a receivable when the underlying transaction that produces the shared revenue has occurred, if (a) the resource provider has appropriated funds for the provision of resources (if required), and the period applicable to the appropriation has begun, and (b) the resource provider has determined that it intends to provide the resources to the resource recipient.

52. The Board affirmed that a contravention of purpose restrictions or grant eligibility requirements in a subsequent reporting period should be recognized as a liability and an expense for the grantee in the period in which the contravention becomes evident. That is, the recipient government should recognize a liability and an expense for the amount that the provider is expected to cancel or reclaim after a transaction has been recognized in the financial statements and it has become apparent that (a) the grant eligibility requirements are no longer met or (b) the recipient will not comply with the purpose restrictions within the specified time limit. If it is probable that in those circumstances, the provider will not provide the resources or will require the recipient to return all or part of the resources already received, a liability and an expense should be recognized. The Board believes that carrying forward existing guidance for contravention of purpose restrictions and grant eligibility requirements is relevant to address circumstances in which contravention becomes evident after the reporting period in which revenue was recognized.

53. The Board’s preliminary view is that a practical application of a portfolio approach should be permitted for recognition of the elements of financial statements arising from binding arrangements, transactions, or performance obligations. A government may apply portfolio recognition if it reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ significantly from applying this guidance to each binding arrangement, transaction, or performance obligation. Current practice relies on portfolio recognition for certain transactions, such as sales taxes. In transactions that are referred to in this document as derived Category B revenue transactions, each underlying transaction gives rise to a single revenue transaction; however, for practical purposes, those transactions are recognized in the aggregate, often on a monthly basis.

54. A portfolio approach would allow a government to recognize multiple transactions in the aggregate. Governments would exercise professional judgment in determining the size and composition of the portfolio to provide reasonable support for the expectation that the outcome of applying the guidance to the portfolio would not differ significantly from applying the guidance to each binding arrangement, transaction, or performance obligation. Aspects that inform the size and composition of a recognition portfolio are the similarities or differences in the terms and conditions of multiple binding arrangements and similarities or differences between multiple transactions included in one binding arrangement.

55. The Board expects that the proposals included in this chapter would primarily impact Category A revenue transactions because existing guidance is limited. Nevertheless, the Board does not expect a significant change in the amount or timing of revenue recognized from Category A revenue transactions if stakeholders have appropriately applied the existing revenue recognition guidance in paragraph 23 of Statement 62. The Board believes that both approaches are conceptually similar; however, the Board chose to adopt a performance obligation recognition methodology because it would provide a more disciplined process for addressing both simple and complex revenue transactions, as well as both recurring and unusual transactions.

56. The Board further acknowledges that some changes will result from the proposals for Category B revenue transactions. The Board agreed to retain the core of existing guidance provided in Statement 33, as amended, even though in some cases, the narrative may include different terminology. The major proposed changes include:

57. An additional source of change is that the Board identified several types of revenue as Category B that existing literature would consider to be exchange or exchange-like transactions, such as regulatory fees and capital fees. Furthermore, pursuant to existing guidance, special assessments could be considered exchange, exchange-like, or nonexchange transactions; the Board agreed that all special assessments should be identified as Category B revenue transactions.

1. This chapter describes the Board’s preliminary views for expense recognition arising from Category A and Category B transactions. As described in Chapter 1, recognition is the second component in the revenue and expense recognition model and is the process of determining when an item should be reported as an element of financial statements. This chapter presents the Board’s preliminary views about expense recognition in financial statements presented applying the economic resources measurement focus and accrual basis of accounting. Expense recognition in financial statements presented applying the short-term financial resources measurement focus and accrual basis of accounting is discussed in Chapter 7.

2. As discussed in Chapter 2, the methodology employed by the Board to analyze expense recognition is the same for both Category A and Category B transactions. As a result, certain preliminary views of the Board are expressed as being applicable to both categories of expense transactions, such as the recognition of a prepaid asset for resources provided before a liability arises. Preliminary views related to recognition application in this chapter are identified separately for Category A and Category B transactions. Several of the recognition proposals related to Category B expense transactions are affirmations of existing guidance. ²⁶ For that reason, those provisions are not expressed as preliminary views of the Board. The preliminary views presented in bold are proposed changes to existing literature.

3. The expense recognition proposals included in this chapter and the revenue recognition proposals included in Chapter 4 are symmetrical as a result of relying on model assumption 4. (See paragraphs 2d and 9 in Chapter 2.)

4. The Board’s preliminary view is that a payable should be recognized when a present obligation to sacrifice resources arises in an expense transaction. A payable arises at different points based on the terms and conditions specified in the binding arrangement. Specific proposals for when a payable arises in Category A and Category B expense transactions are included in each subsection below.

5.  The Board’s preliminary view is that advances in expense transactions are resources provided before a payable arises and should result in a prepaid asset being recognized, regardless of whether those advances are refundable.

6. The Board’s preliminary view is that the performance obligation recognition approach should be used to recognize Category A expense transactions.

7. The Board’s preliminary view is that payables from Category A expense transactions should be recognized when (or as) a government’s counterparty satisfies its performance obligation(s). (See paragraph 28 in Chapter 2.) The Board concluded that when (or as) a government’s counterparty satisfies its performance obligation(s), the government incurs a present obligation to sacrifice resources that it has little or no discretion to avoid (a payable). Consistent with that preliminary view, the Board concluded that payment terms established in a binding arrangement, on their own, do not establish a present obligation to sacrifice resources and, thus, do not give rise to a payable. For example, if a government’s counterparty requires prepayment for a Category A service as a condition of providing that service, the expectation of that advance does not represent a payable.

8. As expressed in paragraph 5 in this chapter, resources provided prior to a counterparty’s satisfaction of its performance obligation(s) represent an advance and should be recognized as a prepaid asset by the government.

9. The Board agreed that the execution of a Category A binding arrangement would not give rise to a payable. (See paragraph 29 in Chapter 2.) In other words, even though signing a contract may obligate a government to provide consideration for its counterparty’s performance, that obligation would not be a present obligation and, therefore, would not be a liability. In reaching that decision, the Board has retained its conclusion that executory contracts do not give rise to the recognition of elements of financial statements. For example, the execution of an expense contract would not be recognized as a payable until there is a transfer of resources between the parties.

10. The Board’s preliminary view is that in Category A expense transactions, the satisfaction of a performance obligation in a reporting period by a government’s counterparty establishes that an outflow of resources is applicable to that reporting period. (See paragraph 30 in Chapter 2.) For that reason, the Board concluded that deferred outflows of resources should not be recognized in Category A expense transactions in the scope of this project. The Board acknowledges that for transactions outside the scope of this project, this recognition attribute does not adequately describe the circumstances in which existing guidance requires the recognition of deferred inflows of resources and deferred outflows of resources. Therefore, the Board noted that this recognition attribute is limited to transactions in the scope of this project. Moreover, this preliminary view should not be analogized to transactions outside the scope of this project. (See paragraph 33 in Chapter 2.)

11. The Board’s preliminary view is that expense in Category A transactions should be recognized when (or as) a government’s counterparty satisfies its performance obligation(s) at a point in time or over time. (See paragraph 31 in Chapter 2.) In paragraphs 12–16 in this chapter, the Board proposed guidance to identify each performance obligation in Category A binding arrangements. The recognition of expense would be based on the satisfaction of those performance obligations. The Board’s preliminary view is that the satisfaction of a performance obligation occurs when a government receives control of a resource (a distinct good or service) from its counterparty. (See also paragraphs 41 and 42 in Chapter 2.) Therefore, expense recognition should reflect that transfer of control. In paragraphs 17 and 18 in this chapter, the Board proposed criteria to identify circumstances in which expense would be recognized (a) over time or (b) at a point in time.

12. The Board’s preliminary view is that each distinct good or service identifiable in a Category A expense binding arrangement represents a performance obligation.

13. A good or service is distinct if (a) the government can obtain the service capacity of the good or service either on its own or together with other resources that are readily available to the government (that is, the good or service is capable of being distinct) and (b) the counterparty’s obligation to transfer the good or service to the government is separately identifiable from other obligations in the binding arrangement (that is, the obligation to transfer the good or service is distinct within the context of the binding arrangement). An example of a distinct good is a book purchased for a classroom. An example of a distinct service is auditing services provided by a CPA firm.

14. If a good or service in a binding arrangement is not distinct, a government would combine that good or service with other goods or services in the binding arrangement until together they make up a bundle of goods or services that is distinct. In some cases, that would result in a government accounting for all the goods or services in a binding arrangement as a single performance obligation. For example, a vendor performs maintenance services for a school district. In the receipt of that service, the school district can identify a multitude of goods or services it receives from the vendor, including labor and supplies. However, none of those goods or services, individually, would satisfy the vendor’s obligation to the school district. Consequently, the school district would combine those identifiable goods or services into a single performance obligation capable of providing a distinct service to the school district.

15. Certain goods or services that are provided in a series also can be distinct. A series of goods or services is distinct if they have the same pattern of transfer from the counterparty and are received and consumed simultaneously. For example, the provision of monthly cleaning services for a government’s facilities would be considered distinct goods or services provided in a series.

16. As explained in Chapter 2, the distinctness of a good or service in an expense transaction should be assessed from the perspective of a government and in the context of the binding arrangement. The Board believes that this assessment, which may require professional judgment, can simplify the recognition process because a government would not need to identify all the tasks that its counterparty may need to accomplish to satisfy its performance obligation. This proposal conveys that the assessment of distinct goods or services should be based on the characteristics of the goods or services, in the context of a specific binding arrangement, with a reasonable understanding of how the government may obtain service capacity from those goods or services. (Cases in Appendix C for Category A expense transactions identify examples of distinct goods or services.)

17. The Board’s preliminary view is that each performance obligation is satisfied either at a point in time or over time. The distinction between recognition at a point in time and recognition over time relies on the identification of when a government’s counterparty transfers control of a resource (the distinct good or service) to the government.

18. Control of a resource means that a party is able to direct the use and employment of the present service capacity of that resource. Category A expense transactions should be recognized over time if either of the following criteria is met because these criteria evidence the transfer of control of a resource over time:

If a Category A expense transaction does not meet either of those criteria, expense should be recognized at the point in time at which the government receives control of the resource from the counterparty.

19. As explained in Chapter 3, the Board believes that expenditure-driven grants should be identified as Category A transactions. Therefore, expense recognition proposals for Category A transactions would be applicable. Expenditure-driven grants are those in which the resource provider commits to the provision of resources to a government dependent on that government providing goods or services (including the construction of capital assets) specified in a grant agreement. Those grants are different in nature from grants in which the grantor commits to the provision of resources to a government with only the requirement that the use of the resources be restricted to a specific purpose, and the provision of resources is not dependent on the recipient government’s provision of goods or services. Grants that restrict the use of resources to specific purposes are referred to in this document as purpose-restricted grants and are identified as Category B transactions.

20. The Board agreed to propose that, for expenditure-driven grants, a payable be recognized by the grantor government when the grantee has incurred allowable costs pursuant to the relevant eligibility requirements established by an executed grant agreement. The Board believes that is the point in time at which a liability arises for the grantor government and that the incurrence of allowable costs evidences the satisfaction of the grantee’s performance obligation(s). Consistent with its preliminary view expressed in paragraph 5 in this chapter, the Board believes that resources provided before the grantee has incurred allowable costs should be recognized as a prepaid asset by the grantor government.

21. The Board further concluded that, for Category A grants, expenses should be recognized as each dollar of allowable costs is incurred in compliance with the relevant grant requirements. That practical approach does not require grantors and grantees to identify each distinct good or service provided in a grant agreement, which in some circumstances, could be challenging (for example, in block grant programs). However, the Board noted that this approach should not be construed to mean that each dollar constitutes a single transaction or that the incurrence of an allowable cost is, in and of itself, the satisfaction of a performance obligation.

22. The Board’s preliminary view is that the assessment of future compliance with expenditure-driven grant requirements should not be taken into consideration for recognition purposes. (See the example in paragraph 22 in Chapter 4.)

23. This preliminary view is not intended to convey that the Board is proposing a higher level of assurance for the assessment of allowable costs. Rather, it conveys the Board’s decision not to include probability of future grant compliance as an attribute for expense recognition. Furthermore, that decision of the Board should not preclude reliance on estimates to recognize the amount of allowable costs incurred pursuant to an executed binding arrangement.

24. As mentioned in paragraph 2 in this chapter, the Board relied on existing literature to develop expense recognition for Category B transactions. Consistent with paragraph 4, the Board believes that a payable from Category B expense transactions should be recognized when a present obligation to sacrifice resources arises, which is specifically identified in each of the three subcategories below.

25. As expressed in paragraph 5 in this chapter, the Board believes that resources provided prior to the establishment of a payable in a Category B expense transaction should be recognized as a prepaid asset. That would be the case regardless of whether the resources provided are refundable.

26. The Board’s preliminary view is that in Category B expense transactions, the attribute that establishes that an outflow of resources is applicable to a reporting period is compliant with time requirements in that period. For that reason, the Board concluded that deferred outflows of resources should be recognized in Category B expense transactions in circumstances in which the government providing resources has established time requirements for the recipient of the resources and compliance with those time requirements has not been achieved. (For a detailed discussion of time requirements, see paragraph 26 in Chapter 4.) The Board acknowledges that for transactions outside the scope of this project, this recognition attribute does not adequately describe the circumstances in which existing guidance requires the recognition of deferred inflows of resources and deferred outflows of resources. Therefore, the Board noted that this recognition attribute is limited to transactions in the scope of this project. Moreover, this preliminary view should not be analogized to transactions outside the scope of this project. (See paragraph 33 in Chapter 2.)

27. The Board’s preliminary view is that expenses that arise from Category B transactions should be recognized based on compliance with time requirements. Absent time requirements, Category B expense should be recognized when a payable arises.

28. The Board’s preliminary view is that Category B transactions include a subcategory identified as contractual binding arrangement transactions, in which two or more willing parties enter into an agreement evidenced by an explicit binding arrangement that provides for the transfer of resources between the parties. An example of a contractual binding arrangement transaction is a purpose-restricted grant that is evidenced by a grant agreement. (For discussions relevant to purpose restrictions and eligibility requirements, see paragraphs 41 and 42 in Chapter 4. Further discussion related to a contravention of purpose restrictions can be found in paragraph 52 in Chapter 4.)

29. The Board affirmed that payables should be recognized for other contractual binding arrangement expense transactions based on the terms and provisions of the binding arrangement. If resources are provided before the government has incurred a liability, those resources should be recognized as assets. If contractual binding arrangement expense transactions include time requirements, a government resource provider should recognize deferred outflows of resources until the recipient begins to comply with those requirements. If contractual binding arrangement expense transactions do not include time requirements, an expense should be recognized at the same time as the payable.

30. The Board’s preliminary view is that Category B transactions include a subcategory identified as general aid to governments transactions, in which legislation or similar law requires the provision of resources from one government to other governments to fund a specific activity or program. In those circumstances, the resource provider appropriates resources on a periodic basis (annual or biennial) and distributes those resources to other governments based on specified formulas. The binding arrangement in that transaction is legislation or similar law. An example of those transactions is state aid to school districts. (See Case 8 in Appendix C.)

31. The Board’s preliminary view is that for general aid to governments transactions, the resource provider should recognize a payable when payments are due, if both of the following criteria are met:

32. The Board’s preliminary view is that in circumstances in which the resource provider cancels its appropriation and communicates the cancellation to the resource recipient, the resource provider should continue reporting a payable and expense if the resource provider expresses its intent to provide the payment in a subsequent period. That preliminary view effectively is an exception to the recognition criterion in paragraph 31a. The Board’s preliminary view is that in circumstances in which the resource provider cancels its appropriation and communicates the cancellation to the resource recipient, the resource provider should not report a payable or expense if the resource provider expresses its intent not to provide the cancelled payment in a subsequent period. It should be noted that these preliminary views are reflective of content included in the (nonauthoritative) Basis for Conclusions section of Statement 33.

33. The Board’s preliminary view is that Category B transactions include a subcategory identified as shared revenue transactions, in which a government (generally a state) shares a proportion of a specific revenue with other governments (generally local governments in the state’s jurisdiction). The resource provider has two transactions: (a) the imposition of revenue and (b) the sharing of that revenue with another government. The binding arrangement in this transaction would be the legislation or ordinance. An example of shared revenue is a state government sharing a proportion of its sales tax with the cities and counties in its jurisdiction.

34. Shared revenue transactions can be supported by two different types of appropriations, periodic appropriations and continuing appropriations. ²⁷ The Board’s preliminary view is that for shared revenue transactions that are supported through periodic appropriations, expense should be recognized by the resource provider following the same proposals as those for general aid to governments. (See paragraphs 31 and 32 in this chapter.)

35.  The Board’s preliminary view is that for shared revenue transactions that are based on continuing appropriations, the resource provider should recognize a payable when the underlying transaction that produces the shared revenue has occurred, if (a) the resource provider has appropriated funds for the provision of resources (if required), and the period applicable to the appropriation has begun, and (b) the resource provider has determined that it intends to provide the resources to the resource recipient.

36. The Board’s preliminary view is that a practical application of a portfolio approach should be permitted for recognition of the elements of financial statements arising from binding arrangements, transactions, or performance obligations. A government may apply portfolio recognition if it reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ significantly from applying this guidance to each binding arrangement, transaction, or performance obligation.

37. A portfolio approach would allow a government to recognize multiple transactions in the aggregate. Governments would exercise professional judgment in determining the size and composition of the portfolio to provide reasonable support for the expectation that the outcome of applying the guidance to the portfolio would not differ significantly from applying the guidance to each binding arrangement, transaction, or performance obligation. Aspects that inform the size and composition of a recognition portfolio are the similarities or differences in the terms and conditions of multiple binding arrangements and similarities or differences among multiple transactions included in one binding arrangement.

38. The Board expects that the proposals included in this chapter would primarily impact Category A expense transactions because guidance is nearly nonexistent. The Board chose to adopt a performance obligation recognition methodology because it provides a disciplined process for addressing both simple and complex expense transactions, as well as both recurring and unusual transactions. As explained in Chapter 2, based on the Board’s belief that the benefits in a government expense transaction should always be construed to be for the public, the majority of governmental expenses are identified as Category A expenses. Furthermore, the Board believes that the proposals included in this chapter are necessary to address the gaps in existing guidance.

39. The Board further acknowledges that the proposals for Category B expense transactions may cause changes as a result of raising nonauthoritative passages from the Basis for Conclusions of Statement 33 to authoritative guidance. The Board agreed to retain the core of existing guidance provided in Statement 33, as amended, even though, in some cases, the narrative may include different terminology. The major proposed changes include:

1. This chapter describes the Board’s preliminary views regarding the measurement applicable to Category A and Category B revenue and expense transactions. As described     in Chapter 1, measurement is the third component in the revenue and expense recognition model  and  is  the   process   of   determining   the   amount   at   which   elements   should  be presented in financial statements. Measurement also impacts whether certain elements   are recognized. As  stated  in  paragraph  8  of  the  Recognition  Concepts  Exposure  Draft, “. . . an item should be recognized and, therefore, reported as an element of the financial statements if it meets both of the following criteria: (a) The item meets the definition of an element (as set forth in Concepts Statement 4 . . . [and] (b) the measurement of the item sufficiently reflects the qualitative characteristics of information in financial reporting . . . described in Concepts Statement No. 1, Objectives of Financial Reporting.”

2. The preliminary views of the Board expressed in this chapter primarily are about measurement principles, with limited application proposals for collectibility and right of return.

3. The Board’s preliminary view is that revenues and expenses should be measured based on the most liquid item in a transaction. Revenue transactions would be measured by relying on the amount of consideration received or receivable—the asset. Expense transactions would be measured by relying on the amount of consideration paid or payable—the liability.

The Board concluded that measuring assets in revenue transactions and liabilities in expense transactions takes into account the role of liquidity in measurement. ²⁸ As explained below, this measurement approach results in financial information that is representative of the qualitative characteristics of information in effective financial reporting as described in Concepts Statement 1. Furthermore, this measurement approach is consistent with paragraph 8 of Concepts Statement No. 6, Measurement of Elements of Financial Statements:

5. The Board believes that measuring assets in revenue transactions and liabilities in expense  transactions  allows  for  information  presented  in  financial  statements  to  be understandable, reliable, relevant, consistent, and comparable. Reliability is discussed in paragraph 64 of Concepts Statement 1 as follows:

6. The Board believes that basing measurement provisions on liquidity provides a reliable result. Although estimation in measurement often is necessary to address uncertainties, the Board believes that in circumstances in which a more liquid item is available, it is preferable to maximize observable inputs. Furthermore, basing measurement provisions on the most liquid item would enhance consistency and comparability of financial information among governments because it would not be necessary to estimate exit prices for performance obligations. Additionally, as shown in the subsequent paragraph, the Board believes that this measurement approach provides more understandable information because subsidies would not be considered in the measurement (or recognition) of a transaction.

7. The Board considered and rejected an alternative measurement approach that would have required the measurement of revenues and expenses based on performance obligations. In considering that alternative, the Board assessed relying on exit prices to measure performance obligations and concluded that the resulting information could be potentially confusing and misleading. For example, if a government receives a prepayment of $15 for a commuter train ride and the government measures the performance obligation through exit prices, it is likely that the exit price of the commuter train ride would exceed the advance. This likelihood is based on the prevalence of subsidies in transportation. Assuming that the exit price is $32, how would the government recognize the advance? Some believe that the government should recognize a liability for $32 and a deferred outflow of resources or expense for $17. If that approach were taken, it would be necessary to consider how revenue should be recognized when the government has satisfied its performance obligation. Alternatively, if an advance is provided for circumstances in which the exit price of providing the service is below the advanced amount, the question arises about how governments should recognize revenue for the amount of the advance received in excess of the exit price before the government satisfies its performance obligation. Even if those practical problems did not exist, the Board believes that measurement of performance obligations is not preferable because it would not provide useful information that reflects the qualitative characteristics of reliability and relevance, as described in Concepts Statement 1.

8. The Board’s preliminary view is that assets and liabilities in the scope of this project should be measured consistently, in accordance with the amount of consideration specified in a binding arrangement. In the development of this Preliminary Views, the following components (not an exhaustive list) were identified as part of the transaction amount specified as consideration in a binding arrangement:

9. It is noteworthy to mention that certain measurement items are included in the scope of this project to the extent that they are a component of consideration but otherwise are outside the scope of this project. For example, the scope of this project includes nonmonetary consideration received in Category A or Category B transactions if the transaction also includes monetary consideration. Transactions that involve solely nonmonetary transactions are excluded from the scope of this project. (See Appendix B.) Examples of excluded transactions are donations of capital assets, nonmonetary transactions as defined in paragraph 272 of Statement 62, and nonmonetary interlocal agreements.

10. Additionally, the scope of this project excludes transactions that are financings, such as the financing of a right-to-use asset that is a lease. However, the Board recognizes that certain transactions in the scope of this project may include a financing component, such as special assessments.

11. The Board considered issues related to incentives and variable consideration but agreed that further analysis would be necessary to comprehensively address those measurement components. The Board also considered discounts to listed prices but decided that any modifications of existing guidance related to discounts would be included in a subsequent due process document. Existing guidance allows governments to present revenue either gross or net of discounts. ²⁹

12.  The Board’s preliminary view is that the amount of revenue that governments recognize in Category A and Category B transactions should not include amounts that are probable of becoming uncollectible or amounts that are probable of being refunded. Generally, uncollectible amounts are recognized as an allowance and a reduction of revenue. In circumstances in which there is no revenue to address collectibility (for example, loan receivables), the uncollectible amount would be recognized as an outflow of resources. Amounts that the government believes are probable of being refunded should be recognized as liabilities.

13. Existing literature provides guidance for revenue recognition net of uncollectible amounts when there is a related revenue to reduce. ³⁰ That guidance requires the recognition of an allowance for the estimated amount that is probable of becoming uncollectible. Governments should recognize subsequent effects of changes in collectibility estimates against current-period revenues (not as prior-period adjustments). Additionally, guidance related to collectibility, including note disclosure requirements, can be found in the contingency literature. ³¹ The Board believes that existing guidance for collectibility should not be modified in this project.

14. Existing literature provides an alternative revenue recognition model for revenue transactions that include goods with a right of return. That guidance is limited to business-type activities and proprietary funds. ³² The Board agreed to modify existing guidance—by removing the alternative recognition model and applying the guidance to all funds. The Board believes that the right of refund is not an attribute of revenue recognition; rather, refundability should be considered when determining the amount of revenue to recognize. That is, if a government extends a right of refund in a revenue transaction, that government would recognize revenue based on the proposals in Chapter 4 (consistent with each category) and not on whether resources received before a legally enforceable claim arises are reimbursable. Also, the amount of revenue recognized would be reduced by an estimated amount for refunds. Additionally, the government would apply the existing guidance for contingencies ³³ to rights of refund, which also relate to both goods and services. Lastly, guidance related to refunds for contravention of purpose restrictions or eligibility requirements have been retained from existing guidance and can be found in paragraph 52 in Chapter 4.

15. The Board’s preliminary view is that for Category A transactions, the measurement of assets in revenue transactions and liabilities in expense transactions should be reflective of an allocated transaction amount. As described in Chapters 4 and 5, the recognition of Category A revenue and expense transactions is based on the satisfaction of performance obligations. Performance obligations are described as the recognition unit of account and are identified as distinct goods or services in the binding arrangement. The Board concluded   that   the   measurement   approach   for   Category   A   transactions   would   be complementary to the recognition methodology that focuses on performance obligations. Therefore, the transaction amount would be allocated to each performance obligation.

16. The Board will consider different allocation methodologies that may be suitable for transactions in the scope of this project and plans to propose those approaches in a subsequent due process document. For example, an assessment would be made about reliance on stand- alone selling prices as a possible allocation methodology. For purposes of this Preliminary Views, the illustrations included in Appendix C follow a simple allocation methodology on which the Board has not yet expressed a view. The inclusion of transaction amount allocation in the illustrations is meant to highlight how the model may be applied as a whole rather than to convey the Board’s specific decisions regarding measurement.

17.  The Board’s preliminary view is that for grants identified as Category A transactions, the measurement of assets in revenue transactions and liabilities in expense transactions should be based on the incurrence of allowable costs at the established grant reimbursement rate.

18. As discussed in Chapters 4 and 5, the Board agreed to propose that the recognition of Category A grants be based on the incurrence of allowable costs as a means to evidence the satisfaction of the government’s performance obligation(s). It follows that the measurement of the grant revenue (grant recipient) and grant expense (grant provider) also would focus on the incurrence of allowable costs. For that reason, the Board agreed that the receivable for the grant recipient should be measured by considering the amount of allowable costs incurred and the reimbursement rate established in the grant agreement. In expense transactions, the grant provider would measure the payable by considering the amount of allowable costs incurred by the grant recipient and the reimbursement rate established in the grant agreement.

19. The proposed measurement principle relies on both existing authoritative literature and the conceptual framework; therefore, the Board does not expect that this proposal would result in changes in existing guidance. Furthermore, the measurement preliminary views for both collectibility and refunds also are based on existing authoritative literature.

1. This chapter describes the application of the Board’s proposals in the Recognition Concepts Exposure Draft and the Financial Reporting Model Improvements Exposure Draft to the recognition of transactions in the scope of this project. The Board proposed in the Financial Reporting Model Improvements Exposure Draft that transactions reported in governmental fund financial statements no longer be identified as revenues and expenditures; rather, transactions reported in governmental fund resource flows statements would be identified as inflows of resources and outflows of resources. For that reason, this chapter and the illustrations in Appendix C describe application guidance for governmental funds using the terms inflows of resources and outflows of resources, not revenues and expenses; otherwise, transactions are referred to as revenue and expense transactions for purposes of this Preliminary Views. The use of the nomenclature in this chapter is not intended to convey that the content in this chapter should be extended to transactions outside the scope of this project.

2. The content included in this chapter is not expressed as preliminary views of the Board because the Board has not made decisions in this project about the short-term financial resources measurement focus and accrual basis of accounting.

3. The Recognition Concepts Exposure Draft proposes conceptual framework guidance for the recognition of elements reported in governmental fund financial statements using the short- term financial resources measurement focus and accrual basis of accounting. (See para- graphs 9–11 of the Recognition Concepts Exposure Draft.) The proposals in the Recognition Concepts Exposure Draft establish a framework in which governments would identify transactions reported in governmental fund financial statements as either short term or long term. This identification is independent of the categorization methodology presented in Chapter 3 of this Preliminary Views.

4. The assessment of whether a transaction is short term or long term is determined by the period of time that elapses between the inception of the transaction or relevant component part thereof and the conclusion of the transaction or relevant component part thereof. ³⁴ If that time period is one year or less, the transaction would be identified as short term. If the time period is more than one year, the transaction would be identified as long term. If a transaction is identified as short term, inflows of resources and outflows of resources would be reported in governmental funds as they occur, that is, following the same recognition and measurement provisions in the economic resources measurement focus and accrual basis of accounting (Chapters 4–6). If the transaction is identified as long term, inflows of resources and outflows of resources would be recognized when payments are due. Recognition and measurement concepts applicable to long-term transactions in the scope of this project are further discussed below.

5. In identifying transactions as short term or long term, the Board proposed an exception; that is, long-term debt issued for short-term purposes would be recognized in governmental fund financial statements as a short-term transaction (Financial Reporting Model Improvements Exposure Draft, paragraph 20). The Board relied on the existing definition of debt articulated in paragraph 4 of Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements. That definition explicitly excludes accounts payable, which means that this exception is not relevant to transactions in the scope of this project.

6. In order to assess whether transactions in the scope of this project are short term or long term, governments would consider three questions:

7. The term transaction, as defined for the purpose of governmental fund reporting, refers to external events between a government and another party or parties that have financial consequences for the government. ³⁵

8. Consistent with the Board’s proposals in this Preliminary Views, it was concluded that the assessment of Category A transactions as short-term or long-term transactions would be made based on the recognition unit of account. With regard to Category B transactions, because a recognition unit of account was not separately identified from a transaction, the assessment of short term and long term should be made for transactions, within each of the five Category B subcategories.

9. In this Preliminary Views, the Board focused on the binding arrangement as the means of evidencing transactions and the relevant terms of those transactions. In other words, a binding arrangement is the vehicle that gives rise to a transaction or transactions. However, the Board noted that it should not be assumed that transactions and binding arrangements are synonymous terms; that is, a binding arrangement is not a transaction in and of itself (although in certain circumstances, such as the renewal of a professional license with a state’s professional licensing department, there is an overlap between the binding arrangement and the transaction). It is reasonable to assume that a binding arrangement can give rise to more than one transaction, more than one type of transaction, or more than one recognition unit of account. For example, property taxes arise as the result of a governing body imposing the tax; the binding arrangement is generally identified as the government’s ordinance which evidenced the imposition. However, this binding arrangement evidences a multitude of transactions; that is, each taxable property can be identified as a single transaction. (Recognition guidance generally is provided in the aggregate; see Chapters 4 and 5 for proposals about the portfolio recognition approach.) In certain circumstances, a single transaction also may be evidenced by multiple binding arrangements; for example, an interlocal agreement, a memorandum of understanding, and a local government ordinance together could evidence a single transfer of resources from one government to another.

10. For revenue or expense transactions in the scope of this project, the inception of the transaction would be identified as step 1 in the recognition methodology (explained in Chapter 2). ³⁶

11. For revenue transactions, the inception of the transaction is identified in paragraph 22 in Chapter 2, as an increase in net assets. Two circumstances provide examples of the inception of a revenue transaction. In the first circumstance, the inception of the transaction would be when a legally enforceable claim arises and the government recognizes a receivable. As explained in Chapter 4, receivables arise at different points in time depending on whether the transaction is Category A or Category B. For example, when a park district operates a summer camp (a Category A transaction) a receivable arises when (or as) the government satisfies its performance obligation; that is, the park district provides summer camp activities. A receivable arises in property taxes (a Category B transaction) when the government imposes the tax. In the second circumstance, the inception of the transaction would be when the government receives consideration in advance of having a legally enforceable claim; for example, when a park district receives payment for a summer camp before the park district has provided summer camp activities, or when a property owner pays property tax before the governing body has imposed the tax.

12. For expense transactions, the inception of the transaction is identified in paragraph 28 in Chapter 2, as a decrease in net assets. Two circumstances provide examples of the inception of an expense transaction. In the first circumstance, the inception of a transaction would be when a present obligation arises, and the government recognizes a payable. As explained in Chapter 5, payables arise at different points in time depending on whether the transaction is Category A or Category B. For example, a payable arises in a Category A purchase of noninventory supplies when the vendor satisfies its performance obligation by delivering the supplies to the government. A payable arises related to shared sales tax revenue under a continuing appropriation (a Category B transaction) when the underlying sales tax transaction (that is, the retail sale) occurs. In the second circumstance, the inception of a transaction is when a government provides consideration in advance of having a present obligation. For example, when a government prepays for supplies before their receipt or when a resource provider advances resources before the underlying sales tax transaction occurs.

13. The conclusion of the transaction generally is when the final payment of cash or other financial assets of the related transaction or component thereof is due. ³⁷ The payment terms in a binding arrangement establish when the government is due to receive payment for revenue transactions or when the government is due to provide payment for expense transactions. If the binding arrangement does not specify payment terms, governments would consider the estimated due date. As previously discussed, the payment terms generally dictate the identification of transactions as short term or long term; however, the Board again noted that it should not be assumed that each payment is representative of a transaction.

14. As previously mentioned, the amount recognized as a receivable in a long-term revenue transaction or a payable in a long-term expense transaction is reflective of the amount that is due. Following the measurement principle presented in paragraph 3 in Chapter 6, the amount recognized as a receivable or payable informs the amount recognized as an inflow of resources or an outflow of resources. Therefore, it is feasible to conclude that the amount recognized for transactions in the scope of this project may differ between the short-term financial resources and the economic resources measurement focuses for long-term transactions.

15. In existing literature, the period of availability informs the recognition of inflows of resources in governmental fund financial statements. Property tax revenue is recognized in the period for which the property tax is imposed, if collected within a 60-day period of availability. ³⁸ If resources are not received within the period of availability, the government recognizes a deferred inflow of resources for the amounts the government expects to collect beyond the period of availability. Other revenues recognized in governmental fund financial statements also are currently subject to a period of availability, except that the period of availability is established by the government’s own policies.

16. The proposals included in the Recognition Concepts Exposure Draft effectively remove the notion of a period of availability. Receivables in the scope of this project are identified as financial assets, and if the receivable arises as a result of a long-term transaction, the receivable and related inflow of resources would be recognized when due and for the amount due. (See Case 14 in Appendix C.)

17. The result of removing the notion of a period of availability simplifies the accounting because it would not be necessary for governments to separately consider the recognition of deferred inflows of resources and deferred outflows of resources for the same transaction based on the measurement focuses. That is, deferred inflows of resources and deferred outflows of resources would be recognized under the same circumstances in both the economic resources measurement focus and accrual basis of accounting and the short-term financial resources measurement focus and accrual basis of accounting for transactions in the scope of this project.

18. From a practical perspective, for revenue or expense transactions identified as long term, a receivable or payable would not be recognized in the governmental fund financial statements for the portions that are due in future periods, and, as a result, it would not be necessary for the government to recognize long-term receivables or long-term payables and related deferred inflows of resources and deferred outflows of resources, respectively. This approach demonstrates the concept that inflows of resources and outflows of resources within the scope of this project should not be recognized in governmental fund financial statements before revenues and expenses are recognized following the economic resources measurement focus and accrual basis of accounting.

19. Both recognition chapters in this Preliminary Views include proposals to assess whether the satisfaction of a performance obligation is achieved at a point in time or over time. (See paragraphs 17 and 18 in both Chapters 4 and 5.) For Category A transactions that include performance obligations satisfied at a point in time, the short-term or long-term assessment is straightforward. The inception of the transaction is when there is a transfer of control of resources that are distinct goods or services (the satisfaction of the performance obligation). The conclusion of the transaction is when the final payment is due for that performance obligation according to the terms of the binding arrangement. The length of time between the inception and the conclusion is evaluated to determine whether the transaction is short term (the period is one year or less) or long term (the period is greater than one year). See Case 17 in Appendix C for an illustration of this approach.

20. For Category A transactions in which the satisfaction of a performance obligation occurs over time, the identification of the inception of the transaction may not be as clear because there is a periodic transfer of control of resources that represents a portion of a distinct good or service. The application of the Financial Reporting Model Improvements Exposure Draft methodology would be based on the satisfaction of a portion of a performance obligation and the payment related to that portion (not the final payment for the entire performance obligation). Consider the example presented in paragraph 18b in Chapter 4, whereby a state agrees to construct a building on land owned by a school district. The school district agrees to make periodic payments to the state, based on the progress of the construction. Assume that the state works on the construction project during the month of May and sends an invoice for the work to the school district at the end of the month with the payment due in 30 days. In this case, the state would identify a short-term revenue transaction because the time between the satisfaction of a portion of a performance obligation (the construction work conducted during May) and its payment due date is 30 days. This conclusion is reached regardless of the duration of the entire construction contract or the fact that the transaction relates to the acquisition of a capital asset. However, again the Board noted that it is important to focus on the portion of the performance obligation that is satisfied and its related payment, rather than on the payment itself.

21. To apply the proposals in the Recognition Concepts Exposure Draft and the Financial Reporting Model Improvements Exposure Draft to expenditure-driven grants, the same consideration of the recognition unit of account would be made as described in paragraph 21 in both Chapters 4 and 5. That is, for practical purposes, the recognition unit of account for expenditure-driven grants is each dollar incurred of allowable costs, pursuant to an executed binding arrangement. As discussed in Chapters 4 and 5, this practical consideration is not intended to convey that each dollar incurred is, in and of itself, a transaction for a distinct good or service. For expenditure-driven grants, the incurrence of allowable costs evidences the satisfaction of a performance obligation, which would be the provision of distinct goods or services (including the construction of capital assets). Based on these practical considerations, the Board concluded that the assessment of whether expenditure-driven grants are short-term or long-term transactions would be made based on the time between the incurrence of allowable costs and the expected reimbursement date. It should be noted that for grants in which allowable costs are incurred before a grant agreement is executed, the inception of the transaction would be identified as the execution of the binding arrangement that is the grant agreement.

22. The proposals in this Preliminary Views related to the recognition of transactions focus on the point in time at which an enforceable legal claim arises for receivables and revenues or when a present obligation to sacrifice resources arises for liabilities and expenses. For Category B transactions, the point in time at which a legally enforceable claim or a present obligation to sacrifice resources arises is specifically identified in each of the subcategories of Category B transactions in paragraphs 28–51 in Chapter 4 (for revenue transactions) and in paragraphs 28– 35 in Chapter 5 (for expense transactions). The inception of the transaction would be at different points in time, depending on the subcategory of Category B transactions and the terms and conditions specified in the binding arrangements associated with the transactions. Due to the nature of Category B transactions, a recognition unit of account is not expected to be needed to make the assessment of short or long term.

23. To illustrate the effects of the Financial Reporting Model Improvements Exposure Draft on short-term Category B transactions, the following example is provided. City A with a fiscal year of July to June, imposes a special assessment in a specific neighborhood for snow removal. The special assessment is imposed on May 1, 20X1, for services for the fiscal period of July 1, 20X0 to June 30, 20X1. The ordinance requires property owners assessed for snow removal to pay the assessment no later than September 30, 20X1.

24. The inception of the transaction is when the governing body imposes the assessment. The payment terms are established in the ordinance and require the property owners to pay the special assessment no later than five months from the inception of the transaction. Therefore, this special assessment is a short-term transaction, and it would be recognized in the same manner as in the economic resources measurement focus and accrual basis of accounting. That is, a receivable and revenue would be recognized on May 1. More specifically, the legally enforceable claim arises on the imposition date (paragraph 31 in Chapter 4) and, therefore, a receivable is recognized at that point. Special assessments are subject to time requirements, that is, the governing body establishes the period for which the assessment would be imposed, which in this case is the fiscal year ending June 30, 20X1; therefore, revenue would be recognized at the same time as the receivable because of compliance with the time requirement. Furthermore, the government would not need to consider the period of availability for this transaction because that is no longer a consideration for recognition in governmental funds. (See Case 14 in Appendix C for an example of long-term special assessments.)

25. Certain transactions in the scope of this project requiring prepayments would be recognized as short-term transactions. For example, if a government requires the prepayment of solid waste collection fees for a fiscal period, the payment terms precede the point in time at which the government can recognize a receivable based on its performance. Similar conclusions would be reached for outflow of resources transactions requiring prepayment. For example, a transaction in which an attorney requires a government to prepay for legal services to be provided in the subsequent fiscal period would be recognized as short term because the payment due date precedes the point in time at which the government would recognize a payable based on the attorney’s performance.

A1. This appendix includes a detailed presentation of the background of the project. Some of its contents are introduced in summary form in Chapter 1.

A2. In 1998, the GASB issued Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, to address revenue and expense recognition for common governmental transactions such as taxation, grants, and some other intergovernmental transactions (such as a state government’s payments to local school districts in support of education). Statement No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues, was issued in 2000 and made clarifying amendments to Statement 33. Guidance for exchange and exchange-like transactions in paragraph 16 of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, is limited to a provision that revenues and expenses should be recognized when an exchange takes place. Further guidance for revenue recognition in exchange transactions was brought into the GASB’s literature in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which was issued in 2010.

A3. In November 2015, a post-implementation review (PIR) of Statement 33, as amended, and Statement 36 was issued. The PIR concluded that the pronouncements (a) resolved the issues underlying their stated objectives, (b) provided decision-useful information for users of financial statements, and (c) can be applied as intended. However, some application challenges were identified. For example, the review noted that some governments experienced challenges determining whether a transaction is exchange or nonexchange and identifying and distinguishing between property tax lien and levy dates.

A4. In 2014, the Financial Accounting Standards Board (FASB) issued Accounting  Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), to amend FASB Accounting Standards Codification® Topic 606, Revenue from Contracts with Customers. Update 2014-09 established a performance obligation model as the basis for revenue recognition, replacing large portions of the then-existing FASB revenue recognition standards. The equivalent pronouncement issued by the International Accounting Standards Board (IASB) was International Financial Reporting Standard 15, Revenue from Contracts with Customers. Those two pronouncements were the result of a joint project between the FASB and the IASB.

A5. In March 2015, the International Public Sector Accounting Standards Board (IPSASB) added various projects to its technical agenda intended to address revenue and certain expense recognition.

A6. After considering those factors, the Board added a pre-agenda research activity to its technical plan in September 2015. Since then, the FASB has issued Accounting Standards Update No. 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, which addresses the classification of revenue and recognition of contributions. In January 2020, the IPSASB issued Collective and Individual Services, Amendments to IPSAS 19 (Provisions, Contingent Liabilities, and Contingent Assets). In February 2020, the IPSASB issued three Exposure Drafts with proposals for revenue recognition and transfers: Exposure Draft 70, Revenue with Performance Obligations; Exposure Draft 71, Revenue without Performance Obligations; and Exposure Draft 72, Transfer Expenses. The GASB actively monitors the work of the FASB and the IPSASB regarding revenue and expense recognition as their activities inform the development of this project.

A7. The GASB’s pre-agenda research consisted of a literature review; archival research related to the revenues of state and local governments; and surveys of preparers, auditors, and users of governmental financial statements that focused on exchange revenues. The research questions included:

A8.  The research confirmed the PIR finding that some governments experience challenges in distinguishing between exchange, exchange-like, and nonexchange transactions. The surveys of preparers and auditors indicated some diversity in practice. Specifically, various preparers recognize the same transactions, such as utility fees, at different points in time. Some recognize a transaction when a good or service is “sold” and others recognize the transaction when an obligation to the customer is fulfilled. The survey of financial statement users indicated that many types of users benefit from information related to revenues and expenses from exchange and nonexchange transactions. For example, information about revenue from exchange transactions is compared with the costs to provide services. Respondents to the user survey indicated that they rely on information about revenue from exchange transactions to evaluate trends in revenue sources, as well as a government’s reliance on those sources. After considering the results of the pre-agenda research, the Board added a project on revenue and expense recognition to its current technical agenda in April 2016.

A9. The Board assembled a task force for the project composed of members broadly representative of the GASB’s stakeholders. Throughout the project, the task force members provided feedback on issues discussed by the Board and on drafts of this Preliminary Views. The Board also held public meetings with the task force in August 2017 and May 2019. In addition, feedback was provided by members of the Governmental Accounting Standards Advisory Council  (GASAC) at 13  of their 15 meetings between November  2015  and  June 2020. When project issues are discussed with task force members and GASAC members, those groups do not take formal positions either in support of or in opposition to those issues.

A10. The GASB issued an Invitation to Comment, Revenue and Expense Recognition, in January 2018 to solicit feedback from stakeholders on the development of a comprehensive revenue and expense recognition model for state and local governments. The Invitation to Comment described three potential models based on two categorization methodologies: the exchange/nonexchange categorization (primarily based on existing guidance) and the performance obligation/no performance obligation categorization. A third model was considered by combining characteristics of the other two categorization methodologies. The Board received 55 written responses to the Invitation to Comment from organizations and individuals. In addition, the Board received verbal responses from, and had the opportunity to further explore the views of, 25 individuals or groups at 3 public hearings.

A11. The feedback received in response to the Invitation to Comment was mixed. Although some stakeholders favored the exchange/nonexchange model primarily because of familiarity with existing guidance, others supported the adoption of a new methodology for categorization to address existing issues. Yet other stakeholders preferred the third model. The nature of the feedback expressed by stakeholders led the Board to conclude that additional analysis of the two categorization methodologies included in the Invitation to Comment was warranted. That detailed analysis assisted in the assessment of the suitability of the categorization component of the Invitation to Comment models. The major issue identified was that existing literature is not suitable as the foundation of an exchange/nonexchange model that could provide continuity in the literature. The definitions of exchange, exchange-like, and nonexchange are inconsistent, as those definitions rely on the subjective notion of value. Because the existing definitions are not symmetrical, it is possible to identify certain transactions that simultaneously can meet more than one definition. The ability of two governments to categorize similar transactions differently is referred to as fragmentation.

A12. The limited suitability of the performance obligation/no performance obligation categorization methodology presented in the Invitation to Comment resulted from a complex definition of performance obligation. The difficulty of differentiating between a performance obligation and a public-purpose obligation, a concept specific mostly to the governmental environment, was an additional challenge identified for that categorization methodology. The following sections describe in more detail the results of the Board’s analysis of the two categorization models included in the Invitation to Comment.

A13. After the Board’s assessment of the Invitation to Comment categorization methodologies and stakeholder feedback to the Invitation to Comment, the Board concluded that neither categorization methodology, as presented in the Invitation to Comment, was suitable for achieving the objective of a comprehensive model capable of providing principles- based revenue and expense guidance on a broad range of transactions. The Board concluded that it was necessary to develop a new categorization methodology. The Board retained the characteristics that were relevant from both methodologies in the development of this proposal; for example, it retained the notion of something for something from exchange transactions. The principles that underlie the new categorization methodology are explained in Chapter 2, and the application of those principles is explained in Chapter 3. Illustrative cases can be found in Appendix C. The remainder of this appendix summarizes the analysis conducted with regard to the two categorization methodologies presented in the Invitation to Comment.

A14. The exchange/nonexchange categorization presented in the Invitation to Comment closely resembled existing guidance in Statement 33, as amended, as the categorization of transactions was based on whether they were exchange or nonexchange. According to Statement 33, as amended, exchange transactions are those in which each party receives and gives up essentially equal values, whereas in nonexchange transactions, a government gives (or receives) value without directly receiving (or giving) equal value in return. The exchange/nonexchange categorization presented in the Invitation to Comment did not fully reflect existing literature because it did not specifically address the complexities of exchange- like transactions.

A15. In their responses to the Invitation to Comment, stakeholders who favored this model commented that they relied on value, benefit, and cost recovery to make a determination of whether a transaction is exchange or nonexchange. However, stakeholder feedback did not identify a specific methodology for how the three characteristics related to their assessment. The Board believes that the major issue is related to the subjectivity of value.

A16. In the private sector, transactions are identified as exchanges based on characteristics that are specific to open markets. For example, whether a customer pays a premium for the latest technology or prefers only to purchase technology at bargain prices, the transaction is considered an exchange transaction because there is a willing buyer and a willing seller in an open market and they agree on a price. That is the case even in circumstances in which the seller incurs a loss in the transaction. Therefore, in general, the characteristics of an open market provide validation that exchange transactions in the private sector are assumed to have equal value.

A17. In the government environment, the ability to identify exchange transactions presents unique challenges because some or all of those market characteristics may not be present. Revenues prevalent in general-purpose governments—for example, property taxes and sales taxes—are compulsory. Therefore, it often is difficult to determine whether there are willing buyers and willing sellers. Revenues prevalent in business-type activities normally arise in a monopolistic environment or include a public-purpose subsidy. For example, tuition fees in higher education generally are subsidized to some extent by state government resources. Therefore, an assertion that the government participates in an open market can be questioned. The inability to establish similar environmental conditions prevents governments from drawing the inference of equal value that private-sector exchange transactions are able to convey. In order to address those issues, existing governmental accounting literature includes guidance about applying various characteristics to assist in the assessment of value.

A18. Existing literature defines exchange transactions as those “in which each party receives and gives up essentially equal values. . . .” ³⁹ Furthermore, the literature explains, “The difference between exchange and exchange-like transactions is a matter of degree. In contrast to a ‘pure’ exchange transaction, an exchange-like transaction is one in which the values exchanged, though related, may not be quite equal or in which the direct benefits may not be exclusively for the parties to the transaction. Nevertheless, the exchange characteristics of the transaction are strong enough to justify treating the transaction as an exchange for accounting recognition.” ⁴⁰ Existing guidance also establishes that “In a nonexchange transaction, a government (including the federal government, as a provider) either gives value (benefit) to another party without directly receiving equal value in exchange or receives value (benefit) from another party without directly giving equal value in exchange.” ⁴¹

A19. The effect of existing guidance is the establishment of a continuum between exchange, exchange-like, and nonexchange transactions. However, it sometimes is difficult to differentiate between the three types of transactions. Existing literature relies on additional characteristics such as benefit, comparison to market prices, and cost recovery to clarify what is meant by equal value. For example, when assessing transactions involving taxes, the general conclusion is that they are nonexchange transactions because the taxpayer gives value without receiving equal value (benefit) in exchange. Therefore, the assessment can be said to be based on the benefit received by the taxpayer. When assessing regulatory fee transactions, such as business licenses, the general conclusion is that those fees are exchange-like transactions because the cost of providing the regulatory service is approximately recovered through the fee charged. Furthermore, when assessing transactions related to the sale of certain assets, a comparison often is made between the transaction amount and market prices to determine whether the transaction is an exchange, an exchange-like, or a nonexchange transaction.

A20. The need to rely on different characteristics to assess equal  value  creates incongruencies in conclusions and establishes the possibility for a single transaction to simultaneously meet the definitions of exchange, exchange-like, and nonexchange, depending on which characteristic is applied—previously referred to as fragmentation. For example, when evaluating special assessments, different conclusions can be reached because the transaction provides a direct benefit to the assessed party, but the benefit to the assessed party is not exclusive. Furthermore, if the special assessment is levied to cover the entire cost of a service, the analysis may focus on the characteristic of cost recovery and ignore that the benefit is not exclusive. Depending on which characteristic is relied on to categorize special assessments, conclusions can be reached that the same transaction meets the definitions of an exchange, an exchange-like, and a nonexchange transaction. The characteristics of benefit, market price comparisons, and cost recovery are articulated in various  provisions of the literature to aid in the assessment of equal value in exchange transactions. In its evaluation of the current guidance, the Board decided to examine those characteristics to consider which, if any, could serve as a foundation for a categorization of transactions based on equal value in a revenue and expense recognition model.

A21. The first characteristic relied upon when assessing equal value was the benefit received in a transaction. Governments generally engage in the provision of services that meet broad societal needs. Typically, the types of services that governments provide are motivated by a public purpose. That environmental characteristic makes the assessment of benefit challenging.

A22. Consider the example of police protection in the assessment of the characteristic of benefit. Although private security services are available in the private sector, it is questionable whether those companies would have the ability to develop a pricing mechanism to the general citizenry that would enable them to provide a service equivalent to that of a city police force. Some stakeholders believe that it is possible for a city to hire a private company to provide those services; however, the issue remains that the city would have to impose taxes to compensate the private company because the private company may not be able to establish individual pricing mechanisms for the citizenry. This issue arises when the private entity attempts to establish a pricing mechanism to be charged to individuals receiving service when the private entity also provides benefits to broader segments of the population. Certain activities may produce a direct benefit to one citizen who may or may not be able to pay for the service, but the benefit is not exclusive to that citizen.

A23. Services that address broad societal needs, in which there is no exclusive benefit to a specific individual, are described by economists as a type of market failure (goods or services that produce positive externalities). ⁴² The reason for identifying those activities as a type of market failure is because those services provide a benefit that is available broadly to a larger segment of the population, and, therefore, the ability to devise pricing mechanisms prevents private companies from being the primary service provider. Instead, governments step in and address those broad societal needs, even in circumstances in which they subcontract the activity to a private company. The issue is that a person who directly benefits from the service may not be willing to pay the price for a service that also provides benefits to others. Those types of services are prevalent in the governmental environment, and, therefore, the ability to rely on benefit to assess equal value is not operable for certain governmental activities.

A24. When assessing equal value, the second characteristic that the Board considered relying upon was a comparison between the amount of consideration provided in a transaction and market prices. There are circumstances in which a government engages in transactions that have market equivalents, such as the purchase or sale of real property. ⁴³  It has been observed that when a government’s counterparty in a transaction is a willing market participant, the transaction generally is carried out at current market price, which normally is considered to be an exchange of equal values. However, if the same transaction occurs between two governments, it has been observed that the transaction price may be significantly below market price because considerations related to the public purpose of the transaction are involved. In those circumstances, existing accounting guidance is not explicit about how to assess equal value. In practice, some stakeholders compare the market price with the transaction price to assess whether equal values are exchanged. However, there is no consistent, quantitative metric that indicates how, in current practice, the conclusion of whether a transaction is exchange or nonexchange may be reached.

A25. One issue to consider is whether the transaction price should be perceived to be indicative of the values exchanged. Some stakeholders have indicated that they focus on the nature and characteristics of the transaction and do not regard the amount of consideration as indicative of the type of transaction.

A26.    An academic explains the relationship between value and price as follows:

A27. The Board concluded that a transaction price is a communication mechanism between the parties in a transaction that assists in conveying messages about purpose and preference. Therefore, the Board concluded that the relationship between market price and the amount of consideration provided in a transaction is not indicative of value, equal or otherwise.

A28. The third characteristic considered in the assessment of equal value was cost recovery. An Implementation Guide question ⁴⁵ clarifies what is meant by equal value for regulatory fees, such as driver’s licenses or marriage licenses. That guidance establishes that if a government is able to recover the cost of providing the regulatory service, the revenue transaction should be identified as an exchange transaction. If the government is able to essentially recover the cost of the activity, the revenue transaction should be identified as an exchange-like transaction.

A29. When analyzing that characteristic, the Board noted that in practice, general purpose governments generally do not employ sophisticated  activity-based costing—or  other similar costing mechanisms—to identify the total cost of each individual service they provide. For that reason, when a government makes a cost-recovery analysis, the cost of individual services may be based on generalizations. Even in circumstances in which a government can accurately estimate the total cost of an activity, another question should be posed: Is the cost recovery percentage of an activity for which a fee is charged indicative of equal value? The overall conclusion is that the fee charged for a specific activity is more reflective of the government’s public policy. That is, the government determines how much of the cost of providing a service it is willing to recover through a fee and how much of that cost should be subsidized. After considering these issues, the Board concluded that the assessment of how much cost is recovered through a fee is not indicative of equal value.

A30. The Board’s overall conclusion reached from the analysis of characteristics relied upon to assess equal value in expense transactions was that the same characteristics used in revenue transactions were not relevant for expense transactions. When considering who receives the benefit of a government’s expense transaction, specific challenges are apparent with regard to identifying whether the benefit applies to society as a whole, to specific citizens or fee payers, or to the government itself. The Board further considered that issue in the development of assumptions for expense recognition, as explained in Chapter 2. The characteristic of cost recovery as a potential proxy for value also was considered in the context of expense transactions. In those transactions, an analysis of the costs of the goods or services acquired by the government is not applicable because those costs are incurred by the counterparty to the transaction. The government incurring the expense would have no basis for assessing value based on the costs of the goods or services provided by the other party.

A31. As discussed throughout this section, the major hurdle to overcome in utilizing existing guidance as the basis for a comprehensive model is the current fragmentation in the literature. It would have been necessary to craft definitions for exchange and nonexchange transactions that were symmetrical and consistent, in addition to clarifying what is meant by value. That is, guidance would have been needed to address the inconsistencies in the exchange, exchange- like, and nonexchange categorization, with the intent of classifying revenue and expense transactions into only one category. However, as previously noted, the Board concluded that value is a subjective notion. As stated by an academic, “Fundamentally, value resides in someone’s mind, and is attributed to or read into an article, rather than residing inherently within it. Thus, value is rooted in ‘desiredness,’ in the subjective importance of the thing in question; in its real or fancied usefulness. Assuredly value is a vague sort of a thing, subject to all the whims of mankind and turned by the least wind of altered circumstances. It is essentially psychosocial at base. . . .” ⁴⁶ Therefore, the ability to clarify existing definitions is problematic because the characteristic of value, the central concept of those definitions, resides in the minds of the participants of the transaction and not on the items exchanged. For that reason, the Board concluded that retaining the existing literature as the basis for developing a comprehensive revenue and expense recognition model was not feasible.

A32. The second model considered in the 2018 Invitation to Comment presented the categorization of transactions based on whether they contain a performance obligation. The advantage of that categorization methodology was that the conclusions were not part of a continuum. Rather, the categorization conclusions were binary (yes or no), which was thought of as a possible path to resolving the fragmentation in existing guidance. That categorization methodology relied on a definition of performance obligation that was presented in the Invitation to Comment. However, the Invitation to Comment model provided limited suitability because of the complexity of the definition. The performance obligation definition included several concepts that needed to be assessed simultaneously, which could have resulted in inconsistent conclusions if, for example, some but not all of the criteria were met.

A33. Furthermore, as previously noted, during the analysis conducted subsequent to the Invitation to Comment, the Board noted that it is inherently difficult in the governmental environment to identify performance obligations because of the need to distinguish them from public-purpose obligations. Precisely describing the difference between a performance obligation and a public-purpose obligation in accounting terms proved to be challenging. For example, it can be argued that a public university has an obligation to provide higher education services to the community because that is the mission of the university, even though that obligation is not a liability. In contrast, the obligation that the university has to a student who enrolls in classes and prepays tuition before the first day of class is a liability because the university has a present obligation. There is a conceptual difference between those obligations—beyond whether the obligation is recognized as a liability. The first obligation is a public-purpose obligation, and the second obligation is a performance obligation. It is notable that the Board found several characteristics of the performance obligation methodology to be effective in the development of a new categorization methodology, for example, the identification of rights and obligations that are interdependent, and incorporated those characteristics into the new methodology proposed in Chapters 2 and 3.

A34.  As mentioned in Chapter 1, the 2018 Invitation to Comment included a third model  that employed the categorization methodology of the exchange/nonexchange model but would have required the recognition of exchange transactions following the performance obligation recognition approach. The Board did not rely on that model in developing this Preliminary Views for two reasons. First, for the reasons explained in paragraphs A14–A31, the categorization methodology was identified as ineffective. Second, the model introduced added complexity because a performance obligation recognition approach would have been required for transactions that existing literature identifies as exchange-like, but those transactions may not have performance obligations. Conversely, certain transactions that existing literature identifies as nonexchange transactions would not have been recognized using a performance obligation recognition approach despite the fact that those transactions include performance obligations.

B1. In addition to the scope exclusions presented in Chapter 1 of this Preliminary Views, the Board considered the inclusion and exclusion of topics addressed in certain pronouncements and current technical agenda projects, as specified in the following paragraphs.

B2. Other than those issues described in paragraph B7, existing pronouncements issued after Statement No. 65, Items Previously Reported as Assets and Liabilities,  such as  Statement No. 81, Irrevocable Split-Interest Agreements, and any topics on the Board’s current technical agenda, are excluded from the scope of issues addressed in this Preliminary Views.

B3. Provisions in the following GASB pronouncements are in the scope of this project (except as noted):

a. NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, as follows:

b. Statement No. 6, Accounting and Financial Reporting for Special Assessments, as amended—revenue and expense recognition provisions only

c. Statement No. 21, Accounting for Escheat Property, paragraph 5, as amended— recognition guidance for escheat revenue

d. Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, as amended

e. Statement 33, as amended

f. Statement 34, paragraph 16, as amended

g. Statement 36

Statement 62, as follows:

B4. Additionally, topics related to measurement, such as collectibility, right of return, and warranties, are included in the scope of this project, as well as topics for which limited guidance exists, such as expense recognition and other complex revenue and expense transactions.

B5. The following pronouncement and specific provisions of pronouncements are excluded from the scope of this project:

a. Statement 62, paragraphs 476–500, as amended—provisions related to accounting for regulated operations

b. Statement 34, paragraph 112, as amended—provisions related to interfund activity, including transactions between the primary government and its blended component units

c. Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, as amended—provisions related to intra-entity transactions

d. Statement 84.

B6. Topics related to display (such as classifying revenues or expenses as operating or nonoperating or distinguishing between contract assets and receivables) or disclosure also are outside the scope of this project.

B7. Guidance for intangible assets that are outside the scope of the following pronouncements will be assessed in a subsequent phase of the project to determine whether that guidance should be included in the scope of this project:

a. Statement No. 51, Accounting and Financial Reporting for Intangible Assets, as amended

b. Statement No. 87, Leases, as amended

c. Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements

d. Statement No. 96, Subscription-Based Information Technology Arrangements.

Topics that will be further assessed include naming rights, mineral rights, patents, and other nonfinancial intangible assets.

C1. As mentioned in Chapter 1, the Board has not yet considered certain topics that may impact the manner in which these illustrations are presented. An example of a specific topic that may impact these illustrations is the assessment of percentage of completion of the satisfaction of a performance obligation over time. Other examples include allocation of the transaction amount to each performance obligation and the measurement of variable consideration. For purposes of the illustrations presented in this appendix, a simplified approach was taken to further operationalize the underlying principles of the proposed model. However, the manner in which those topics have been illustrated is not intended to convey any tentative positions of the Board.

C2. The cases are presented in a format that first includes an assessment of whether the transactions would be identified as Category A or Category B by applying the categorization methodology proposed in Chapter 3. As presented in that chapter, categorization may be assessed on a portfolio basis for groups of binding arrangements that have similar characteristics if a government reasonably expects that the results of applying a portfolio approach would not differ from categorizing the individual binding arrangements. Because identifying the similarities of characteristics in binding arrangements to create a portfolio requires professional judgment to be exercised, the cases included in this appendix do not specify whether the application of a portfolio approach is appropriate, as the facts and circumstances of each government would be taken into consideration when making that determination.

C3. The cases include recognition and measurement topics reflecting the proposals in  Chapters 4, 5, and 6. The cases generally assist in identifying the distinct good or service in Category A transactions, as well as determining whether recognition is at a point in time or over time. In Chapters 4 and 5, a proposal is included to permit recognition on a portfolio basis for groups of binding arrangements, transactions, or performance obligations that have similar characteristics, if the government reasonably expects that the results of applying a portfolio approach would not differ significantly from recognizing the individual binding arrangements, transactions, or performance obligations. Again, because determining the size and composition of a portfolio requires professional judgment to be exercised, the cases included in this appendix do not specify whether a portfolio approach is appropriate, as the facts and circumstances of each government would be taken into consideration when making that determination.

C4. In addition to this Preliminary Views, the Board has approved two related Exposure Drafts—Financial Reporting Model Improvements (Reporting Model Exposure Draft) and Recognition of Elements of Financial Statements (Recognition Concepts Exposure Draft). As indicated throughout this Preliminary Views, the Board’s proposals in the Recognition Concepts Exposure Draft and the Financial Reporting Model Improvements Exposure Draft influence this  project  because they  address  the recognition  and measurement of inflows  of resources and outflows of resources in governmental funds using the short-term financial resources measurement focus and accrual basis of accounting. This Preliminary Views explains in Chapter 7 how the Board’s proposals in those Exposure Drafts would be applied to transactions in the scope of this project. Furthermore, for the cases that involve transactions that commonly would be reported in governmental funds, this appendix also includes a section that illustrates the application of the proposals included in the aforementioned Exposure Drafts. In applying the guidance proposed in the Financial Reporting Model Improvements Exposure Draft for governmental fund financial statements presented using the short-term financial resources measurement focus and accrual basis of accounting, a government would determine whether transactions are long term or short term by assessing whether the period of time from the inception of each transaction to the conclusion of each transaction is one year or less. The cases first identify whether the transaction would be long term or short term based on the terms of the binding arrangement. Then, for the cases that are identified as long term, an explanation is included of the impact the short-term financial resources measurement focus and accrual basis of accounting would have on the recognition and measurement of the elements of financial statements.

C5. Several of the cases included in this appendix illustrate both sides of a transaction if it is expected that the transaction includes two governments—expenditure-driven grants, for example. In those instances, both the revenue and expense transactions are illustrated in a single case, and the table of contents identifies those cases under two topics—revenue and expense.

A State with a June 30 fiscal year-end awards a grant for the construction of a bridge in the amount of $500 million to a County with a June 30 fiscal year-end; the bridge is expected to be completed in 2 years. The grant agreement is signed by representatives of both governments on May 1, 20X1, and requires that the County submit quarterly reimbursement requests. Allowable costs include architecture, engineering, and construction costs related to the construction of the bridge. The State commits to reimbursing the County for 90 percent of allowable costs.

The County’s first reimbursement request will cover the period of June 1–August 31, 20X1. Prior to the issuance of the June 30, 20X1 financial statements, the County receives invoices totaling $30 million from the architectural and engineering firms for work performed in June 20X1. The construction vendor began work in June but did not submit an invoice to the County prior to the issuance of the County’s financial statements. Because the County does not receive an invoice from the construction vendor before the issuance of the financial statements, the County applies professional judgment in estimating that the construction work performed in June totals $10 million.

The State ordinarily remits payments to local governments within two weeks of the end of the period to which a grant reimbursement relates. The County anticipates that it will submit the June 1–August 31, 20X1 reimbursement request to the State on September 15, 20X1, and receive payment from the State before October 1, 20X1.

Step 1—Identification of a binding arrangement: The grant agreement is the binding arrangement. It can be presumed to be enforceable by law. The grant agreement has economic substance because it is expected to result in a cash inflow for the County and a cash outflow for the State.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and both the County’s representative and the State’s representative have the ability to bind their respective entities with their approval.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The County has a right to consideration and an obligation to construct a bridge. The State has an obligation to provide consideration to the County upon the County’s incurrence of allowable costs.

Step 4—Determination of whether the rights and obligations are interdependent: The County’s right to consideration is dependent on the construction of a bridge as agreed upon in the grant agreement. The State’s obligation to provide consideration is dependent on the County’s construction of a bridge.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction from the perspective of the County and a Category A expense transaction from the perspective of the State.

In this Category A binding arrangement, the distinct good or service is the construction of a bridge as stipulated in the grant agreement. Consistent with the proposals in Chapters 4 and 5, the incurrence of each dollar of allowable costs is used as the recognition unit of account, as a practical matter.

The County would recognize a receivable and revenue as it satisfies the performance obligation by constructing a bridge; the satisfaction of the performance obligation is evidenced by the incurrence of allowable costs in compliance with the relevant grant requirements.

Revenue would be measured based on the most liquid item; in this case, the County would measure the receivable by considering the amount of allowable costs incurred and the established grant reimbursement rate. The County has determined that the entire amount of the receivable is probable of collection.

At the end of fiscal year 20X1, the County would have the following trial balance related to that revenue transaction:

*The County has incurred allowable costs totaling $30 million related to architecture and engineering services and expects to receive 90 percent of those resources from the State ($27 million). Because the County did not receive an invoice from the construction vendor before the issuance of the financial statements, the County applies professional judgment in estimating that the construction work performed in June totals $10 million of allowable costs and expects that 90 percent of those resources will be reimbursed by the State ($9 million).

The proposals included in this Preliminary Views do not address the accounting and financial reporting for the transactions between the County and the architectural, engineering, and construction vendors because capital assets are not within the scope of this project.

In Category A grant transactions, as previously noted, the incurrence of each dollar of allowable costs is used as the recognition unit of account. In this case, the inception of the revenue transaction is the County’s recognition of a receivable as allowable costs are incurred. The State ordinarily remits payments to local governments within two weeks of the end of the period to which a grant reimbursement relates. The County concludes that this grant revenue transaction is short term. Reliance on the recognition unit of account to make the short-term or long-term assessment should not be assumed to convey that each dollar of allowable costs is a separate transaction; as this recognition unit of account is a practical consideration.

Because the grant revenue in this case would be considered a short-term transaction, there would be no difference in recognition and measurement of the transaction between the short- term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

It should be noted that although the purpose of the grant transaction is to provide resources for the construction of a capital asset, the fact that a capital asset is a nonfinancial asset would not affect the determination that this grant transaction is short term because the determination is based on the length of time between the incurrence of allowable costs and the County’s estimation of when the resources will be received.

The State would recognize a payable and an expense as the County satisfies the performance obligation by constructing a bridge; the satisfaction of the performance obligation is evidenced by the incurrence of allowable costs in compliance with the relevant grant requirements.

Expense would be measured based on the most liquid item; in this case, the State would measure the payable by considering the amount of allowable costs incurred by the County and the established grant reimbursement rate.

At the end of fiscal year 20X1, the State would have the following trial balance related to that transaction:

*The State does not expect to receive a reimbursement request from the County until September 15, 20X1; therefore, the State relies on estimates to prepare financial statements for the fiscal year ended June 30, 20X1. In this case, the County communicates to the State that the County incurred reimbursable allowable costs of $36 million in June 20X1.

In Category A grant transactions, as previously noted, the incurrence of each dollar of allowable costs is used as the recognition unit of account. In this case, the inception of the expense transaction is the State’s recognition of a payable as the County incurs allowable costs. The State ordinarily remits payments to local governments within two weeks of the end of the period to which a grant reimbursement relates and that period is three months. Therefore, the State concludes that this grant expense transaction is short term. Reliance on the recognition unit of account to make the short-term or long-term assessment should not be assumed to convey that each dollar of allowable costs is a separate transaction; as this recognition unit of account is a practical consideration. Because the grant expense transaction in this case would be considered short term, there would be no difference in recognition and measurement of the transaction between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

Consider the previous scenario, except that the grant agreement stipulates that a maximum of$25 million related to architecture and engineering services is reimbursable. On July 25, 20X1, the County and State amend the grant agreement to allow for the reimbursement of the excess$2 million in architecture and engineering costs that were incurred in June 20X1.

In this scenario, the County would recognize a receivable and revenue related to architecture and engineering services in the amount of $25 million. A receivable and revenue related to the excess $2 million arise on July 25, 20X1, when the grant agreement is amended. The County does not have a legally enforceable claim to the additional $2 million at June 30, 20X1, because the legally enforceable claim arises when the grant agreement is amended.

At the end of fiscal year 20X1, the County would have the following trial balance related to that transaction:

*$25 million related to architecture and engineering plus $9 million related to construction.

Similarly, the State would not include the additional $2 million in its measurement of a payable at June 30, 20X1.

A Hospital is engaged only in business-type activities and has a June 30 fiscal year-end. The Hospital provides an inpatient surgical procedure in June 20X1 that requires the Hospital to provide numerous goods and services to the patient, such as a patient room, meals, nursing care, physician services, therapy services, and medication. The Hospital bills $59,000 for the procedure and estimates that $10,000 of that amount will not be collected.

Step 1—Identification of a binding arrangement: The patient responsibility forms or other in- processing documents of understanding required by the Hospital to be completed by the patient at check-in constitute the binding arrangement. Those forms or other documents can be presumed to be enforceable by law. The binding arrangement has economic substance because it is expected to result in a cash inflow for the Hospital.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and the Hospital has the ability to be bound by the terms proposed in the binding arrangement. The patient approves the terms of the arrangement by completing the forms or other documents and scheduling the procedure and is capable of becoming bound by the arrangement.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The Hospital has a right to consideration and an obligation to provide a medical service. The patient has a right to receive a service (a surgical procedure) and an obligation to provide consideration (from a third party such as an insurer, out-of-pocket, or a combination of the two) to the Hospital.

Step 4—Determination of whether the rights and obligations are interdependent: The Hospital’s right to consideration is dependent on the provision of healthcare services agreed upon in the binding arrangement.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction.

In this Category A revenue transaction, the distinct good or service is the provision of a bundle of healthcare services as stipulated in the binding arrangement. The Hospital concludes that there is a need to bundle the healthcare goods and services because the transfer of each individual good or service would not provide the patient with the expected outcome of the surgical procedure. Rather, the combination of all of those goods and services constitutes a single distinct performance obligation. The Hospital would recognize a receivable and revenue as it satisfies the performance obligation by providing the specified healthcare services because the Hospital would transfer control of the resources to the patient as it transfers the distinct bundle of numerous goods and services that comprise the inpatient surgical procedure.

Because the patient simultaneously receives and consumes the resources provided by the Hospital’s performance (healthcare), the performance obligation is satisfied over time and revenue would be recognized accordingly.

Revenue would be measured based on the most liquid item; in this case, the Hospital would measure the receivable. Amounts that are probable of becoming uncollectible would be recognized as an allowance for doubtful accounts and a reduction of revenue.

The Board has made no tentative decisions about the measurement of variable consideration, specifically discounts or implied price concessions; therefore, this case does not address those issues.

The Hospital would have the following trial balance at June 30, 20X1:

*Receivables would be reported net of estimated uncollectible amounts.

A State with a June 30 fiscal year-end awards a loan/grant for the replacement and expansion of catch basins for a Town’s stormwater system for a maximum amount of $5.5 million. The Town also has a June 30 fiscal year-end. The installation and replacement of catch basins is expected to be completed in three years. The loan/grant agreement stipulates that if the Town completes the construction within the specified time frame and receives all of the required environmental permits, the State will forgive one half of the loan principal. In that case, the loan remaining would be $2.75 million and would be repaid over a period of 10 years, without interest.

The loan/grant agreement is signed by representatives of both governments on August 15, 20X1, and requires that the Town process periodic loan requests that will be paid 45 days after the State has received them. The Town reports its stormwater activities in an enterprise fund. The State also reports its loan activities in an enterprise fund. As of June 30, 20X2, the Town has incurred $850,000 of allowable costs and has submitted a loan request. The Town receives the loan of $850,000 in fiscal year 20X3.

During fiscal year 20X3, the Town incurs $3.5 million of allowable costs and receives a loan for $3 million. The remaining $500,000 is submitted for a loan request on June 20, 20X3, and received in fiscal year 20X4. During fiscal year 20X4, the Town completes construction by incurring $950,000 of allowable costs and receives a loan for those costs. The Town receives all environmental permits on May 1, and the State forgives half of the loan principal on June 15, 20X4.

Step 1—Identification of a binding arrangement: The loan/grant agreement is the binding arrangement. It can be presumed to be enforceable by law. The loan/grant agreement has economic substance because it is expected to result in a cash inflow for the Town and a cash outflow for the State.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and both the Town’s representative and the State’s representative have the ability to bind their respective entities with their approval.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The Town has a right to consideration (a loan) and an obligation to construct stormwater catch basins. The State has an obligation to provide consideration (a loan) to the Town upon the Town’s incurrence of allowable costs. In addition, the Town has a right to receive a loan forgiveness for completion of the project and compliance with environmental requirements established in the loan/grant agreement. The State has an obligation to partially forgive the loan upon the Town’s completion of the project and compliance with environmental requirements.

Step 4—Determination of whether the rights and obligations are interdependent: The Town’s right to consideration (the loan) is dependent on the construction of stormwater catch basins as agreed upon in the loan/grant agreement. The Town’s right to loan forgiveness is dependent on the completion of the project and compliance with environmental requirements. The State’s obligation to provide consideration (the loan) is dependent on the Town’s construction of stormwater catch basins, and the obligation to partially forgive the loan is dependent on the Town’s completion of the project and compliance with environmental requirements.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction from the perspective of the Town and a Category A expense transaction from the perspective of the State.

In this Category A binding arrangement, there effectively are two transactions—a loan and a grant. The first transaction is a loan wherein the Town borrows the money from the State to construct catch basins. The second transaction results from the State forgiving half of that loan (effectively providing a grant) due to the Town completing the project and complying with the environmental requirements. Consistent with the proposal in Chapters 4 and 5, the incurrence of each dollar of allowable costs is used as the recognition unit of account, as a practical matter. Furthermore, the proposal in paragraph 22 of both Chapters 4 and 5 would not permit consideration of the probability of completion of the project and compliance with environmental requirements in the future to inform the recognition of the loan during the construction period.

The Town would recognize a receivable as it satisfies the performance obligation by incurring allowable costs in compliance with the relevant loan/grant requirements. However, that receivable would be recognized with a liability to represent the loan outstanding.

At the end of fiscal year 20X2, the Town would have the following trial balance related to that loan/grant transaction:

In fiscal year 20X3, the Town receives cash in the amount of $850,000, which decreases the June 30, 20X2 receivable. The Town incurs $3.5 million of allowable costs and receives a loan for $3 million. The remaining $500,000 is submitted for a disbursement request on June 20, 20X3, and is receivable from the State as of June 30, 20X3. The $3.5 million of allowable costs incurred increases the loan payable to the State from $850,000 to $4,350,000. At the end of fiscal year 20X3, the Town would have the following trial balance related to that loan/grant transaction:

In fiscal year 20X4, the Town receives cash in the amount of $500,000, which decreases the June 30, 20X3 receivable. The Town completes construction by incurring $950,000 of allowable costs and receives a loan for $950,000. The State forgives half of the loan principal ($2,650,000) on June 15, 20X4. At the end of fiscal year 20X4, the Town would have the following trial balance related to that loan/grant transaction:

The proposals included in this Preliminary Views do not address the accounting and financial reporting for the transactions between the Town and the construction vendors because capital assets are not within the scope of this project.

The State would recognize a payable as the Town satisfies the performance obligation by incurring allowable costs in compliance with the relevant loan/grant requirements. However, that payable would be recognized with a receivable to represent the loan outstanding.

At the end of fiscal year 20X2, the State would have the following trial balance related to that loan/grant transaction:

In fiscal year 20X3, the State makes a cash payment in the amount of $850,000, which decreases the June 30, 20X2 payable. The Town incurs $3.5 million of allowable costs, and the State provides a loan for $3 million. A request for the remaining $500,000 is submitted on June 20, 20X3, and is payable by the State as of June 30, 20X3. The $3.5 million of allowable costs incurred  by  the  Town  increases  the  loan  receivable  from  the  Town  from  $850,000  to$4,350,000. At the end of fiscal year 20X3, the State would have the following trial balance related to that loan/grant transaction:

In fiscal year 20X4, the State makes a cash payment in the amount of $500,000, which decreases the June 30, 20X3 payable. The Town completes construction by incurring $950,000 of allowable costs, and the State provides a loan for $950,000. The State forgives half of the loan principal ($2,650,000) on June 15, 20X4. At the end of fiscal year 20X4, the State would have the following trial balance related to that loan/grant transaction:

A State with a June 30 fiscal year-end conducts a lottery that was created primarily to generate resources for the State’s educational activities. An opportunity for financial gain is provided to any individual who chooses to participate in the state lottery. When the winning ticket is drawn, a fixed percentage of the dollar amount of tickets sold is paid to the winner. If, in any given week, there is no winner, the award offered the following week increases. The State conducts a drawing each Friday for individuals who purchased tickets during the preceding week (Saturday through Friday). The State receives resources for the purchase of the lottery tickets in the week that spans fiscal years 20X1 and 20X2 as follows:

Because the weekly drawing is conducted each Friday, the first drawing in fiscal year 20X2 provides an opportunity for financial gain to those individuals who purchased lottery tickets in the last four days of fiscal year 20X1 (Saturday–Tuesday) or the first three days of fiscal year 20X2 (Wednesday–Friday). It is assumed in this case that there is not a winner in the drawing.

The legislation requires that 90 percent of the proceeds (net of awards and operating costs) of the State Lottery Fund (an enterprise fund) be used for the State’s educational activities and 10 percent of the net proceeds be used to fund the State pension plan. Application of the proposals in the Preliminary Views is intended to address categorization, recognition, and measurement of lottery revenue within the State Lottery Fund. Interfund transfers are not in the scope of this project.

Step 1—Identification of a binding arrangement: Each lottery ticket sold is a binding arrangement between the purchaser and the State. It can be presumed to be enforceable by law. Furthermore, the lottery ticket has economic substance because it is expected to result in a cash inflow for the government. When an individual purchases a lottery ticket, they enter into a binding arrangement with the State.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and the State is bound by the terms established in the lottery ticket. The individual who purchases a lottery ticket accepts the terms and conditions of the arrangement by purchasing the ticket.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The State has a right to consideration (which is received in advance) and an obligation to perform (which is to provide an opportunity for financial gain). The individual has a right to participate in a game of chance for an opportunity for financial gain by providing consideration for the lottery ticket.

Step 4—Determination of whether the rights and obligations are interdependent: Both the State’s right to consideration and the individual’s provision of consideration are dependent on the State’s satisfaction of its obligation to perform. The State’s performance (provision of an opportunity for financial gain) is interdependent with its right to consideration. The individual’s right to receive an opportunity for financial gain is interdependent with their provision of consideration.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction. Restrictions on the purpose of the net proceeds have no effect on categorization.

Based on the categorization analysis, the State has a performance obligation to provide the opportunity for financial gain at weekly drawings. The State has a right to consideration. (Based on the terms of the binding arrangement, that consideration is provided in advance of the government’s performance.) Because each performance obligation is satisfied at a point in time, the State would recognize revenue at the point(s) in time at which it transfers control of the resources (each opportunity for financial gain) to the individuals. Revenue from lottery tickets would be recognized when the government performs its obligation and would be measured based on the most liquid item in the transaction—the advance provided.

In the last four days of fiscal year 20X1 (Saturday–Tuesday, after the last weekly drawing of fiscal year 20X1), individuals purchased lottery tickets in the amount of $32 million. Those resources represent an advance and would be recognized as liabilities. As of June 30, 20X1, the State would have the following trial balance related to those transactions:

Additionally, individuals purchased lottery tickets in the amount of $24 million in the first three days of fiscal year 20X2 (Wednesday–Friday, before the first weekly drawing of fiscal year 20X2). When the State conducts the weekly drawing on July 3, 20X1, it satisfies its performance obligation by providing the individuals who purchased lottery tickets June 27– July 3 with the opportunity for financial gain. On July 3, 20X1, the State would have the following trial balance related to those transactions:

A Park District with a June 30 fiscal year-end operates a summer camp that begins on June 1 and ends on August 7. A parent registers their child to attend the summer camp for 10 weeks and commits to making payments of $175 at the beginning of each week. Payments are not refunded for any missed days of camp, and failure to make a weekly payment would prevent a child from attending camp that week. On each Monday in June, the Park District receives cash in the amount of $175. The week that spans fiscal years 20X1 and 20X2 (June 29–July 3) includes two days in fiscal year 20X1 and three days in fiscal year 20X2.

Step 1—Identification of a binding arrangement: The camp registration document is the binding arrangement. It can be presumed to be enforceable by law. The registration document has economic substance because it is expected to result in cash inflows for the government.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and the government has the ability to be bound by the terms in the registration document. The parent who registers their child approves the terms of the summer camp by completing the registration process and is capable of becoming bound by the arrangement. A child wishing to participate in the summer camp would not be able to register themselves because a minor is not a party with capacity to enter into a binding arrangement.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The Park District has a right to consideration and an obligation to provide a service for the specified period. The parent has a right to receive a service (that is, their child attending the summer camp) and an obligation to provide consideration.

Step 4—Determination of whether the rights and obligations are interdependent: The Park District’s right to consideration is dependent on the provision of summer camp services agreed upon in the registration. The parent’s obligation to provide consideration is dependent on receiving access to the agreed-upon summer camp services from the Park District.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction.

In this Category A revenue transaction, the distinct good or service is the provision of summer camp activities as stipulated in the registration documents. The Park District would recognize revenue  as  it  satisfies  the performance obligation by providing  the specified summer  camp activities because the Park District would transfer control of the resource as the Park District operates the summer camp. This would be the case regardless of whether the child attends every day for which they are registered.

The payment schedule is weekly, in advance of performance; therefore, the Park District would recognize those resources as a liability at the beginning of the week. The Park District’s performance obligation (provision of summer camp activities) is satisfied as the child simultaneously receives and consumes the resources; the performance obligation is satisfied over time. Therefore, revenue would be recognized accordingly (throughout the week).

Revenue would be measured based on the most liquid item; that is, the prepayment received. Given that the terms of the binding arrangement prevent children from attending without prepayment, collectibility is not an issue.

The Park District receives cash each of the five Mondays in the month of June, and four weeks and two days of the summer camp occur during fiscal year 20X1 (June 1–June 30). At the end of fiscal year 20X1, the Park District would have the following trial balance related to those transactions:

*The revenue calculation below is an example of a basic allocation methodology:

In this case, the inception of the transaction is when the Park District recognizes a receivable. The Park District concludes that the transaction is short term.

Because the provision of summer camp activities in this case would be considered a short-term transaction, there would be no difference in recognition and measurement of the transaction between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

A Transportation Agency with a December 31 fiscal year-end sells 30-day transit passes that may be used for an unlimited number of bus rides for 30 days from the date of purchase. If the pass is not used within the 30-day period, it expires without a refund. The passholder scans the pass upon boarding the bus. Each pass is sold for $130.

An individual purchases a pass on December 17, 20X1.

The Transportation Agency is reported as a business-type activity.

Step 1—Identification of a binding arrangement: Each transit pass is a binding arrangement. The terms of the pass can be presumed to be enforceable by law. Furthermore, each pass has economic substance because it is expected to result in a cash inflow for the Transportation Agency.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement. The Transportation Agency, by selling 30- day transit passes, is approving and binding the Transportation Agency to the terms and conditions in the pass. The individual who purchases the pass is accepting the terms of the pass by purchasing the pass.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The Transportation Agency has an obligation to perform (to provide regularly scheduled bus service consistent with the terms of the pass) and a right to consideration for its service, which was received in advance. The individual has a right to receive resources in the form of access to regularly scheduled bus service and has elected to provide consideration in advance of that service.

Step 4—Determination of whether the rights and obligations are interdependent: Both the Transportation Agency’s right to consideration and the individual’s provision of consideration are dependent on the Transportation Agency’s satisfaction of its obligation to perform. The Transportation Agency’s performance (provision of services) gives rise to its right to consideration. The individual’s right to receive resources results from their provision of consideration.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction.

In this Category A revenue transaction, the distinct good or service is the provision of bus services for 30 days. The Transportation Agency would recognize revenue as it satisfies the performance obligation of providing bus transportation because it transfers control of the resource to the passholder as the Transportation Agency makes the service available. This would be the case regardless of whether the passholder rides the bus.

The terms and conditions of the binding arrangement stipulate that payment for the service be provided in advance of the Transportation Agency’s performance; therefore, the Transportation Agency would recognize those resources received in advance as a liability. Because the passholder simultaneously receives and consumes the resources provided by the Transportation Agency’s performance (making bus service available), the performance obligation is satisfied over time, and revenue would be recognized accordingly.

Revenue would be measured based on the most liquid item; that is, the payment received. Given that the terms of the binding arrangement require prepayment of the entire amount, collectibility is not an issue. Furthermore, the Transportation Agency in this case does not provide refunds for unused passes; therefore, an allowance for refundable amounts is not considered. At December 31, 20X1, the Transportation Agency would have the following trial balance related to the purchase of the bus pass on December 17:

*The revenue calculation is an example of a basic allocation methodology: ($130 ÷ 30 days) × 15 days.

A College is engaged only in business-type activities and has a June 30 fiscal year-end. The College has a 16-week fall semester that is conducted between August 19 and December 13, 20X1. Registration begins on June 14, 20X1. On June 20, 20X1, a commuter student registers for 12 credit hours and makes a nonrefundable tuition deposit of $160 (10 percent of the total tuition of $1,600). The remaining tuition of $1,440 is billed to the student at that time and is due on August 5, 20X1. Students may withdraw from any class before August 21, 20X1, and receive a refund (except for the 10 percent nonrefundable deposit).

Step 1—Identification of a binding arrangement: The registration agreement or other documents that describe the arrangement between the College and the student constitute the binding arrangement. It can be presumed to be enforceable by law. The binding arrangement has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and the College has the ability to be bound by the terms proposed in the registration agreement or other documents. The student who registers approves the terms of the arrangement by completing the registration process and is capable of becoming bound by the arrangement. It is presumed that the student is of legal age to enter into a contract.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The College has a right to consideration and an obligation to provide a service for the specified period. The student has a right to receive a service (education) and an obligation to provide consideration (tuition payment).

Step 4—Determination of whether the rights and obligations are interdependent: The College’s right to consideration is dependent on the provision of education agreed upon in the registration. The student’s obligation to provide consideration is dependent on receiving access to the agreed upon education services from the College.

The transaction includes all four characteristics; therefore, the transaction is a Category A revenue transaction.

In this Category A revenue transaction, the distinct good or service is the provision of education as stipulated in the registration documents. Because the student simultaneously receives and consumes the resources provided by the College’s performance (education), the performance obligation is satisfied over time, and revenue would be recognized accordingly. This would be the case regardless of whether the student attends every day for which they are registered.

The terms of the binding arrangement require payment in advance of performance; therefore, the College would not recognize a receivable when the remaining tuition of $1,440 is billed to the student because the College does not have a legally enforceable claim to a resource at that time. Therefore, the College does not control a resource that is an asset before performance has begun. Payments received in advance of performance would be recognized as a liability. Revenue would be recognized over time.

Revenue would be measured based on the most liquid item; that is, the prepayment received. Given that the terms of the binding arrangement prevent students from attending without prepayment, collectibility is not an issue.

On June 20, 20X1, the College receives cash in the amount of $160. The remaining tuition of$1,440 is billed to the student at that time and is due on August 5, 20X1. At the end of fiscal year 20X1, the College would have the following trial balance related to that transaction:

On August 5, 20X1, the College receives cash in the amount of $1,440 and recognizes a liability. Over the fall semester, the College satisfies its performance obligation and recognizes revenue in such a way that reflects the satisfaction of the performance obligation over the fall semester. At the end of fiscal year 20X2, the College would have the following trial balance related to that transaction:

Legislation has been established by a State to provide resources to school districts for elementary and secondary education. The State establishes an appropriation each year to fund the provision of resources to the school districts. The allocation of the appropriated resources among school districts is determined by a formula that considers enrollment, student performance, and income levels, among other factors. The State and the school districts have June 30 fiscal year-ends.

A State appropriation is established on May 2, 20X0, that allocates $40 million to a School District for the fiscal year ending June 30, 20X1. The State remits one quarter of the annual appropriation to the School District on the 15th day of September, December, March, and June.

Step 1—Identification of a binding arrangement: The legislation that established the provision of resources is a binding arrangement. It can be presumed to be enforceable by law. The legislation has economic substance because it is expected to result in a cash inflow for the School District and a cash outflow for the State.

Step 2—Identification of mutual assent between parties of capacity: The School District does not approve the terms and conditions of the binding arrangement because those terms and conditions are unilaterally established by the State’s legislation.

The transaction is a Category B revenue transaction from the perspective of the School District and a Category B expense transaction from the perspective of the State because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as a general aid to governments transaction because it results from legislation that requires the provision of resources from one government to other governments to fund a specific program.

In a general aid to governments transaction, a liability would be recognized by the resource provider and a receivable by the resource recipient when both of the following criteria are met:

The School District would recognize a receivable when a legally enforceable claim arises. In this case, a legally enforceable claim arises, and a receivable would be recognized, on the due date of each quarterly payment. In a Category B revenue transaction, revenue that is subject to time requirements would be recognized based on compliance with time requirements. The terms of the binding arrangement (the legislation) require use of the resources on elementary and secondary education in the fiscal year ending June 30, 20X1. In this case, the School District would recognize revenue simultaneously with the recognition of a receivable because the fiscal period of the resource provider has begun. Revenue would be measured based on the most liquid item; in this case, the School District would measure the receivable. The School District has determined that the receivable is measurable and that the entire amount is probable of collection.

At the end of fiscal year 20X1, the School District would have the following trial balance related to that transaction:

The State would recognize a payable when a present obligation arises. In this case, a present obligation arises when both of the general aid to governments criteria are met on the due date of each quarterly payment. In a Category B expense transaction, expenses that are subject to time requirements would be recognized based on compliance with time requirements. The terms of the binding arrangement require use of the resources on elementary and secondary education in the fiscal year ending June 30, 20X1. In this case, the State would recognize expense simultaneously with the recognition of a payable because the period when the resources are required to be used (fiscal year 20X1) has begun. Expense would be measured based on the most liquid item; in this case, the State would measure the payable.

At the end of fiscal year 20X1, the State would have the following trial balance related to that transaction:

In this case, the inception of the transaction is when the School District recognizes a receivable and the State recognizes a payable. The State remits one quarter of the annual appropriation to the School District on the 15th of September, December, March, and June. The School District and the State conclude that the transactions are short term.

Because the general aid to governments in this case would be considered short-term transactions, there would be no difference in recognition and measurement of the transactions between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

Consider the same scenario, except that the State notifies the School District on June 1, 20X1, that the State is experiencing cash flow constraints, and the payment due on June 15, 20X1, will be remitted instead on July 15, 20X1.

The School District would recognize a receivable when a legally enforceable claim arises. In this case, a legally enforceable claim arises when both of the general aid to governments criteria are met on June 15, 20X1. The expected delay of the fourth quarter payment would not affect revenue recognition because the State intends to provide the resources to the School District.

At the end of fiscal year 20X1, the School District would have the following trial balance related to that transaction:

The State would recognize a payable when a present obligation arises. In this case, a present obligation arises when both of the general aid to governments criteria are met on June 15, 20X1. The expected delay of the fourth quarter payment would not affect expense recognition because the State intends to provide the resources to the School District.

At the end of fiscal year 20X1, the State would have the following trial balance related to that transaction:

In this alternative scenario, the inception of the transaction is the same as in the original scenario (when the School District recognizes a receivable and the State recognizes a payable). The State remits one quarter of the annual appropriation to the School District on the 15th of September, December, March, and June. Once a transaction is classified as either short term or long term, it should continue to be reported in that classification. ⁴⁷ The School District and the State conclude that the transactions are short term.

Because the general aid to governments in this alternative scenario would be considered short- term transactions, there would be no difference in recognition and measurement of the transactions between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

Consider the same scenario, except that the State notifies the School District on June 1, 20X1 that, due to an economic downturn, the State is reducing the fiscal year’s education budget by 25 percent. The payment due on June 15, 20X1, will not be made.

As of June 1, 20X1, the general aid to governments recognition criteria no longer are met. The State appropriation has been reduced to exclude the fourth quarter payment, and the State no longer intends to make that payment. Therefore, the School District would not recognize a receivable related to the fourth quarter general State aid payment.

At the end of fiscal year 20X1, the School District would have the following trial balance related to that transaction:

As of June 1, 20X1, the general aid to governments recognition criteria no longer are met. The State appropriation has been reduced to exclude the fourth quarter payment, and the State no longer intends to make that payment. Therefore, the State would not recognize a payable related to the fourth quarter general State aid payment.

At the end of fiscal year 20X1, the State would have the following trial balance related to that transaction:

An Airport with a December 31 fiscal year-end has one active Passenger Facility Charge (PFC) application approved by the Federal Aviation Administration (FAA) that allows the  Airport  to charge $4 for each passenger who boards an airplane at the Airport. The PFC application lists a number of capital improvement projects for which the PFC resources will be used. Airlines collect PFC fees by including the charge on their customers’ passenger tickets and remitting them to the Airport. For the fiscal year ended December 31, 20X1, there were 85,000 enplaned passengers on whom a PFC was imposed. The Airport receives remittances related to the enplanements throughout the fiscal year. As of December 31, 20X1, the airlines had remitted $230,000 to the Airport related to 20X1 enplanements.

Step 1—Identification of a binding arrangement: The Airport’s PFC application approved by the FAA is the document that evidences the Airport’s authority to charge PFCs and, therefore, is the binding arrangement. It can be presumed to be enforceable by law. The application has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: The passengers do not approve the terms and conditions of the binding arrangement. The PFC application only is approved by the Airport and the FAA. The passengers’ purchase of airline tickets upon which a fee has been imposed does not constitute mutual assent to the terms and conditions of the PFC application.

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as a derived Category B transaction because it results from the government imposing a fee on an underlying Category A transaction, which is the passenger’s enplanement.

The Airport would recognize a receivable when a legally enforceable claim arises. In this case, a legally enforceable claim arises when the underlying activity on which the fee is imposed occurs—when a passenger is enplaned. Because PFCs are not subject to time requirements, revenue would be recognized simultaneously with the receivable.

Revenue would be measured based on the most liquid item; in this case, the Airport would measure the receivable based on the number of enplaned passengers and the established PFC rate. To simplify the estimation, certain measurement issues are ignored; for example, administrative fees collected by airlines are not considered.

At the end of fiscal year 20X1, the Airport would have the following trial balance related to those transactions:

*85,000 enplanements × $4 PFC

A University is engaged only in business-type activities and has a June 30 fiscal year-end. A corporation promises to give the University $500,000 as a contribution to the University’s merit-based scholarship program. The entirety of the donation will be awarded to students at the University’s discretion. A donation agreement is signed by the corporation and the University a month before the end of fiscal year 20X1. The corporation transfers cash in the amount of $500,000 in fiscal year 20X2, three months after the donation agreement was signed.

Step 1—Identification of a binding arrangement: The donation agreement is a binding arrangement. It can be presumed to be enforceable by law. The donation agreement has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and both the University representative and the representative of the donor corporation have the ability to bind their entity with their approval. The University has the ability to reject the donation.

Step 3—Identification of substantive rights and obligations of each party: The University has a right to receive resources pursuant to the arrangement and an obligation to provide scholarships, both of which are substantive. The corporation has an obligation to provide resources to the University and a right to enforce the use of those resources for its prescribed purposes, both of which are substantive.

Step 4—Determination of whether the rights and obligations are interdependent: The substantive rights and obligations are not interdependent. The University has a right to receive resources, but that right is not dependent on the provision of distinct goods or services. Rather, the resources are restricted for a specific purpose. Purpose restrictions are not considered to be performance obligations.

Categorization Conclusion

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as a contractual binding arrangement transaction because it results from the government willingly entering into a contractual type agreement with the donor.

The University would recognize a receivable when a legally enforceable claim arises, as described in the donation agreement. In this case, a legally enforceable claim arises when the donation agreement is signed by both parties a month before the end of fiscal year 20X1. In a Category B revenue transaction, purpose-restricted revenue that is not subject to time requirements would be recognized simultaneously with the receivable. In this case, the corporation’s stipulation that the donation provide a scholarship program does not affect revenue recognition because the requirement that the resources be used for scholarships is a purpose restriction.

Revenue would be measured based on the most liquid item; in this case, the University would measure the receivable. The University has determined that the receivable is measurable and that the entire amount of the donation is probable of collection.

At the end of fiscal year 20X1, the University would have the following trial balance related to that transaction:

Consider the same donation, except that the donation agreement includes a time requirement. In this alternative scenario, the donation agreement stipulates that the donated resources be used to establish an endowment and that the University invest the gift and maintain the principal intact in perpetuity. The investment income is to be used for scholarships.

The categorization of the transaction would not change because time requirements do not affect categorization. In this circumstance, the University would recognize a receivable when a legally enforceable claim arises, as described in the donation agreement. A legally enforceable claim arises when the donation agreement is signed by both parties a month before the end of fiscal year 20X1. Furthermore, the University would recognize deferred inflows of resources until the time requirements are met (when the University receives the resources and begins complying with the investment requirements and preservation of principal).

At the end of fiscal year 20X1, the University would have the following trial balance related to that transaction:

When the corporation transfers cash in the amount of $500,000 in fiscal year 20X2 and the University begins to comply with the time requirement (to maintain the principal intact), the deferred inflows of resources would be reduced and revenue would be recognized.

A State’s Professional Licensing Department (Department) coordinates the activities of the professional licensing boards that are responsible for establishing and enforcing standards for licensure. An individual who holds a valid professional license in the State may use the title associated with the license, such as certified public accountant, building code official, or professional engineer. Every two years, an individual holding a professional license submits renewal documents and a fee of $200. If the relevant requirements are met, the individual’s license is renewed for a period of two years.

The State’s fiscal year-end is June 30, 20X1, and the State’s annual budget includes an appropriation of professional licenses fees to address spending of two fiscal periods. For example, the State’s appropriation reflects that the $200 fee from a license that is valid July 1, 20X1, through June 30, 20X3, finances the fiscal year ended June 30, 20X2 ($100) and the fiscal year ended June 30, 20X3 ($100).

An individual submits renewal documents and the fee of $200 on May 15, 20X1. On May 20, 20X1, the Department determines that the individual has met the licensure requirements and issues a license to the individual that is valid July 1, 20X1, through June 30, 20X3.

Step 1—Identification of a binding arrangement: The renewal documents, together with the State statute that established the licensing requirement, is a binding arrangement. It can be presumed to be enforceable by law. The binding arrangement has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and the government representative has the ability to bind the government by the terms established in the statute and license renewal documents. The individuals who apply for renewal of professional licenses are accepting the terms of the State statute by applying for licensure.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are not identifiable. The State has a right to consideration (which is received in advance) but does not have an obligation to provide substantive goods or services to the counterparty. The individual’s right to work as a professional is not received from the State; rather, that right is regulated by the State.

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as an imposed Category B transaction because it results from the government imposing a fee to regulate an activity.

The terms and conditions of the binding arrangement stipulate that payment be provided before the State has a legally enforceable claim to those resources; therefore, the State would recognize those resources received in advance as a liability. The State has a legally enforceable claim to the resources when the individual has applied for the license and the Department has determined that the individual has met the licensure requirements (May 20, 20X1).

Once the State has a legally enforceable claim to the resources, the State would recognize deferred inflows of resources until the time requirements are met (when the period begins that the revenue is intended to finance). Deferred inflows of resources and revenue would be measured based on the most liquid item, the payment received. Given that the terms of the binding arrangement require prepayment of the entire amount, collectibility is not an issue.

At June 30, 20X1, the State would have the following trial balance related to that transaction:

The deferred inflows of resources would be recognized as revenue in the amounts of $100 on July 1, 20X1, and $100 on July 1, 20X2 (when each period begins that the revenue is intended to finance).

In this case, the inception of the transaction is the State’s recognition of a receivable. The State concludes that the transaction is short term.

Because the transaction in this case would be considered a short-term transaction, there would be no difference in recognition and measurement of the transaction between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

A City with a December 31 fiscal year-end adopts a resolution on November 30, 20X0, to impose a property tax that is intended to fund the fiscal year ending December 31, 20X1. Property tax bills are sent after the imposition of the tax and are due in two equal installments on April 30 and October 31, 20X1.

Property taxes imposed on November 30, 20X0, total $32,000,000, and the City estimates that$640,000 will not be collectible. Between November 30, 20X0, and December 31, 20X0, the City receives payments in the amount of $300,000 related to the November 30, 20X0, imposition.

Step 1—Identification of a binding arrangement: The City resolution that imposed a property tax is a binding arrangement. It can be presumed to be enforceable by law. The resolution has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: The binding arrangement does not contain mutual assent. The individual property owner does not approve the terms and conditions of the binding arrangement.

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as an imposed Category B transaction because it results from the government imposing a tax on property ownership.

The City would recognize a receivable when a legally enforceable claim arises. In this case, a legally enforceable claim arises when the City imposes the property tax on November 30, 20X0, and a receivable would be recognized at that time. In a Category B revenue transaction, revenue that is subject to time requirements would be recognized based on compliance with time requirements. The terms of the binding arrangement (the City resolution) stipulate that the November 30, 20X0 imposition is intended to fund the fiscal year ending December 31, 20X1. Therefore, the City would recognize a deferred inflow of resources on November 30, 20X0, and revenue on January 1, 20X1.

Revenue would be measured based on the most liquid item; in this case, the City would measure the receivable and payments received.

The City would have the following trial balance at December 31, 20X0, related to the November 30, 20X0 property tax imposition:

*Receivables would be reported net of estimated uncollectible amounts.

Revenue would be recognized as the time requirement is met (by reducing the deferred inflows of resources); that is, the City would recognize revenue for $31,360,000 on January 1, 20X1.

In this case, the inception of the transaction is the City’s recognition of a receivable; that is, November 30, 20X0. The payments are due on April 30 and October 31, 20X1. The City concludes that the transactions are short term.

Because those property tax transactions would be considered short-term transactions, there would be no difference in recognition and measurement of the transactions between the short- term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting. As explained in Chapter 7, the period of availability is not taken into consideration because that notion is not applicable in the short-term financial resources measurement focus and accrual basis of accounting.

A private corporation promises to give $15,000 to a Library for its Early Childhood Services Department. A donation agreement is signed by the corporation and the Library a month before the end of fiscal year 20X1 that includes the corporation’s stipulation that the Library provide three annual performance reports (due by the end of fiscal years 20X2, 20X3, and 20X4) that describe how the funding has benefited the Library’s provision of early childhood services. The corporation transfers cash in the amount of $15,000 in fiscal year 20X2, three months after the donation agreement was signed.

Step 1—Identification of a binding arrangement: The donation agreement is a binding arrangement. It can be presumed to be enforceable by law. The donation agreement has economic substance because it is expected to result in a cash inflow for the Library.

Step 2—Identification of mutual assent between parties of capacity: Both parties approve the terms and conditions of the binding arrangement, and both the Library representative and the corporation’s representative have the ability to bind their respective entities with their approval. The Library has the ability to reject the donation.

Step 3—Identification of substantive rights and obligations of each party: The Library has a right to receive resources pursuant to the arrangement and an obligation to provide services through its Early Childhood Services Department, both of which are substantive. The private corporation has an obligation to provide resources to the Library and a right to enforce the use of those resources for its prescribed purposes, both of which are substantive.

Step 4—Determination of whether the rights and obligations are interdependent: The substantive rights and obligations are not interdependent. The Library has a right to receive resources, but that right is not dependent on the provision of distinct goods or services. Rather, the resources are restricted for a specific purpose. Purpose restrictions are not considered to be present obligations or performance obligations.

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as a contractual binding arrangement transaction because it results from the government willingly entering into a contractual-type agreement with the donor.

The Library would recognize a receivable when a legally enforceable claim arises, as described in the donation agreement. In this case, a legally enforceable claim arises when the donation agreement is signed by both parties a month before the end of fiscal year 20X1. In a Category B revenue transaction, purpose-restricted revenue that is not subject to time requirements would be recognized simultaneously with the receivable. The terms of the donation do not include time requirements. In this case, the corporation’s stipulation that the donation benefit the Early Childhood Services Department does not affect revenue recognition because it is a purpose restriction. Purpose restrictions do not create performance obligations that are interdependent with a right to receive consideration, nor do they represent a liability. The three annual performance reports that describe how the funding has benefited the Library’s provision of early childhood services also do not affect revenue recognition.

Revenue would be measured based on the most liquid item; in this case, the Library would measure the receivable. The Library has determined that the receivable is measurable and that the entire amount of the donation is probable of collection.

At the end of fiscal year 20X1, the Library would have the following trial balance related to that transaction:

In this case, the inception of the transaction is the Library’s recognition of a receivable. Because the terms of the donation agreement do not specify a payment date, the Library would approximate when payment is expected to be made based on prior experience with other donations. The Library’s experience is that donors usually provide resources between 3 to 10 months from the time of their donation agreement. The Library concludes that the transaction is short term.

Because the donation in this case would be considered a short-term transaction, there would be no difference in recognition and measurement of the transaction between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

Consider the previous donation, except that the donation agreement includes a time requirement. In this alternative scenario, the donation agreement stipulates that the donated resources that are restricted for the Early Childhood Services Department be used over the course of three years, as follows:

Fiscal year 20X2: $4,000

Fiscal year 20X3: $5,000

Fiscal year 20X4: $6,000

The categorization of the transaction would not change because time requirements do not affect categorization. In this circumstance, the receivable recognized by the Library would be recognized as deferred inflows of resources until the time requirements are met.

At the end of fiscal year 20X1, the Library would have the following trial balance related to that transaction:

The corporation transfers cash in the amount of $15,000 in fiscal year 20X2. Revenue would be recognized as the time requirements are met (by reducing the deferred inflows of resources); that is, the Library would recognize $4,000 in revenue in fiscal year 20X2, $5,000 in fiscal year 20X3, and $6,000 in fiscal year 20X4.

In this case, the inception of the transaction is the Library’s recognition of a receivable. Because the terms of the donation agreement do not specify a payment date, the Library would approximate when payment is expected to be made based on prior experience with other donations. The Library’s experience is that donors usually provide resources between 3 to 10 months from the time of their donation agreement. The Library concludes that the transaction is short term.

The Library’s determination that the donation is a short-term transaction would not change because time requirements do not affect the determination of whether a transaction is long term or short term. Because the donation in the alternative scenario would be considered a short-term transaction, there would be no difference in recognition and measurement of the transaction between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting. Also, it is notable that the recognition of deferred inflows of resources does not differ between the short- term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

A City with a December 31 fiscal year-end has an ongoing program to install sidewalks in neighborhoods throughout the City. After a project is completed and actual project costs have been determined, the City adopts a resolution to impose the special assessment on adjacent properties for the cost of installing sidewalks. Special assessment bills are sent after the imposition of the special assessment and are due in five equal installments on January 31 of each subsequent year.

The City completed a sidewalk project on September 15, 20X1, and adopted a resolution imposing a special assessment for property owner A in the amount of $6,000 on September 25, 20X1. The property owner is expected to make payments in the amount of $1,200 on January 31st of each of the following 5 years.

Step 1—Identification of a binding arrangement: The City resolution that imposed a special assessment is a binding arrangement. It can be presumed to be enforceable by law. The resolution has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: The binding arrangement does not contain mutual assent. Although many special assessment programs require property owner approval, the approval generally is not unanimous and does not evidence mutual assent because the individual property owner does not approve the terms and conditions of the binding arrangement.

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as an imposed Category B transaction because it results from the government imposing an assessment based on property ownership.

The City would recognize a receivable when a legally enforceable claim arises. In this case, a legally enforceable claim arises when the City has imposed the special assessment on September 25, 20X1. That special assessment is not subject to time requirements; rather, the periodic payments represent a financing. In a Category B revenue transaction, revenue that is not subject to time requirements would be recognized simultaneously with the receivable.

Revenue would be measured based on the most liquid item; in this case, the City would measure the receivable. The Board has not made tentative decisions about the measurement of significant financing components in a transaction; therefore, this case does not address the time value of money.

The City would have the following trial balance at December 31, 20X1, related to property owner A:

In this case, the inception of the transaction is the City’s recognition of a receivable. The payments for each single transaction are due in installments for five years following the inception of the transaction. The City concludes that the transactions are long term.

Because the transactions are long term, the government would recognize in governmental fund financial statements a receivable and an inflow of resources from noncurrent activities on each payment due date. That is, each January 31, the City would recognize a receivable and an inflow of resources from noncurrent activities in the amount of $1,200 related to property owner A. At the end of fiscal year 20X1, the City would not have recognized any items in governmental fund financial statements related to those transactions.

If property owner A makes the payments annually on the due date, the City would record the following journal entry on January 31 of 20X2–20X6:

If property owner A does not make a payment, the City would record the following journal entry on January 31 (the day the missed payment is due):

Special assessments generally include multiple property owners. Consider the circumstance in which property owner B chooses to pay their entire imposed amount in January 20X2. The government would not reassess the conclusion that the transaction is long term because the terms of the binding arrangement specify that the payment is due in five annual installments. ⁴⁸ Furthermore, given that the terms of the binding arrangement affect all the property owners similarly, the assessment of a long-term transaction would be made for the entire resolution and not for individual property owners. Therefore, regarding property owner B, the City would recognize the receipt of cash for $6,000 and an inflow of resources from noncurrent activities of $6,000; there is no basis on which to recognize a deferred inflow of resources.

Legislation established by a State allocates a percentage of the State’s sales tax revenues to counties to be used for education. The State provides monthly remittances by relying on continuing appropriations, which are an operation of law. Both the State and the counties have June 30 fiscal year-ends. The State collects sales tax revenue monthly from retail businesses based on applicable retail sales from the previous month. Two months later, the State remits the portion of that sales tax revenue allocated to the counties to those counties. Thus, the shared revenue remitted each month to the counties represents their percentage of shared state sales tax revenue from retail sales that occurred three months prior.

County A’s portion of the State sales tax revenue for the last three months of the fiscal year are as follows:

*At June 30, 20X1, the County estimates the receivable arising from retail sales that occurred in June 20X1.

Step 1—Identification of a binding arrangement: The legislation that established the provision of resources is a binding arrangement. It can be presumed to be enforceable by law. The legislation has economic substance because it is expected to result in a cash inflow for the County and a cash outflow for the State.

Step 2—Identification of mutual assent between parties of capacity: The binding arrangement does not contain mutual assent because the County does not approve the terms and conditions of the binding arrangement.

The transaction is a Category B revenue transaction from the perspective of the County and a Category B expense transaction from the perspective of the State because it does not contain all four of the characteristics of a Category A transaction.

The transaction would be further identified as shared revenue because it results from legislation that requires the State to share a proportion of a specific source of revenue with other governments.

In a shared revenue transaction, a liability would be recognized by the State and a receivable by the County when the underlying transaction that is shared has occurred, if both of the following criteria are met:

The County would recognize a receivable when a legally enforceable claim arises. In this case, a legally enforceable claim arises when both of the shared revenue criteria are met as retail sales occur on which a tax is imposed. In a Category B revenue transaction, purpose-restricted revenue that is not subject to time requirements would be recognized simultaneously with the receivable. The terms of the binding arrangement only require use of the resources for education. In this case, the State’s stipulation that the resources be spent on education does not affect revenue recognition because it is a purpose restriction. Therefore, the County would recognize a receivable and revenue when the underlying retail sales occur.

Revenue would be measured based on the most liquid item; in this case, the County would measure the receivable. The County has determined that the receivable is measurable and that the entire amount is probable of collection.

At the end of fiscal year 20X1, the County would have the following trial balance related to those transactions:

In this case, the inception of the transaction is when the County recognizes a receivable. The State generally remits payments three months after the inception of the transactions. The County concludes that the transactions are short term.

Because the transactions in this case would be considered short-term transactions, there would be no difference in recognition and measurement of the transactions between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

The State would recognize a payable when a present obligation arises. In this case, a present obligation arises when both of the shared revenue criteria are met as retail sales occur on which a tax is imposed. In a Category B expense transaction, expenses that are not subject to time requirements would be recognized simultaneously with the payable. The terms of the binding arrangement only require use of the resources for education. In this case, the State’s stipulation that the resources be spent on education would not affect expense recognition because it is a purpose restriction. In the case of the State, there would be a simultaneous recognition of two transactions. The first transaction requires revenue recognition for imposed Category B transactions for sales tax revenue (not addressed in this case). The second transaction requires expense recognition for sales tax revenue shared with the County. In that second transaction, the State would recognize a payable and an expense when the underlying sales tax transaction occurs.

Expense would be measured based on the most liquid item; in this case, the State would measure the payable. The State has determined that it intends to make the payments as scheduled.

At the end of fiscal year 20X1, the State would have the following trial balance related to that expense transaction:

In this case, the inception of the transaction is when the State recognizes a payable. The State generally remits payments three months after the inception of a transaction. The State concludes that the transaction is short term.

Because the transactions in this case would be considered short-term transactions, there would be no difference in recognition and measurement of the transactions between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

A police officer working for a City with a December 31 fiscal year-end issues a traffic ticket (Notice of Violation) to an individual. The ticket may be disputed within seven days of issuance. If neither a dispute nor a payment is received within 7 days of the issuance of the ticket, a second Notice of Violation is mailed, allowing the individual 21 days to request a hearing. If no response to the second Notice of Violation is received within 21 days, the individual is liable for the fine. If the ticket is disputed and the court rules that the fine is enforceable, payment of the fine is due within seven days.

The police officer issued a $100 traffic ticket to an individual on December 15, 20X1. The ticket has not been disputed, and neither a payment nor a response to the Notice of Violation has been received as of December 31, 20X1.

Step 1—Identification of a binding arrangement: The local government ordinance that established the traffic rule and related violation procedure is a binding arrangement. It can be presumed to be enforceable by law. The ordinance has economic substance because it is expected to result in a cash inflow for the government.

Step 2—Identification of mutual assent between parties of capacity: The binding arrangement does not contain mutual assent because the individual violating the rule has not approved the terms and conditions of the binding arrangement.

The transaction is a Category B revenue transaction because it does not contain all four of the characteristics of a Category A transaction.

This transaction would be further identified as an imposed Category B transaction because it results from the government imposing a fine for violations of the law.

The City would recognize a receivable when a legally enforceable claim arises, as described in the ordinance. In this case, a legally enforceable claim arises when the individual pays the fine or when the individual is found liable—that is, when the period allowed for dispute lapses or, if disputed, when a court rules that the fine is enforceable. In a Category B revenue transaction, revenue that is not subject to time requirements would be recognized simultaneously with the receivable. Punitive fees generally are not subject to time requirements.

Revenue would be measured based on the most liquid item; in this case, the City would measure the receivable.

At the end of fiscal year 20X1, the second Notice of Violation has been sent and no response has been received, but the 21-day period in which the individual can request a hearing has not elapsed. Therefore, the City would not recognize any items in the financial statements related to that transaction because a legally enforceable claim (the asset) has not arisen.

Consider the same scenario as before, except that the individual disputed the ticket on December 21, 20X1. In this alternative scenario, the court ruled on December 27, 20X1, that the fine is enforceable, with payment due on January 3, 20X2. Because the court ruling establishes the existence of an asset (an enforceable legal claim), the City would recognize the receivable on that date and, because there are no time requirements, the revenue would be recognized simultaneously with the asset. At the end of fiscal year 20X1, the City would have the following trial balance related to that transaction:

In this case, the inception of the transaction is the City’s recognition of a receivable. That is, the receivable arises when the period allowed for dispute lapses or, if disputed, when a court rules that the fine is enforceable. Payment is due within one year from the date the receivable arises. The City concludes that the transaction is short term.

Because the traffic ticket in this case would be considered a short-term transaction, there would be no difference in recognition and measurement of the transaction between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

A Village with a June 30 fiscal year-end contracts with a vendor to purchase handheld radios, which are not capitalized per the Village’s capitalization policy. The vendor delivers all of the radios in June 20X1 and sends the Village a bill in July 20X1 for the full amount of the purchase ($27,000), due August 3, 20X1.

Step 1—Identification of a binding arrangement: The contract between the Village and the vendor is a binding arrangement. It can be presumed to be enforceable by law. Furthermore, the agreement has economic substance because it is expected to result in a cash outflow for the government.

Step 2—Identification of mutual assent between parties of capacity: The Village and the vendor approve the terms and conditions of the binding arrangement. The Village representative and the vendor representative have the ability to bind their respective entities by approving the terms and conditions of the contract.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The vendor has an obligation to perform (to replace radios) and a right to consideration for its performance. The Village has a right to receive resources in the form of radios and an obligation to provide consideration.

Step 4—Determination of whether the rights and obligations are interdependent: Both the vendor’s right to receive consideration and the Village’s obligation to provide consideration are dependent on the vendor’s satisfaction of their obligation to perform. The vendor’s performance (transfer of radios) gives rise to its right to receive consideration. The Village’s right to receive resources results from its obligation to provide consideration.

The transaction in this case includes all four characteristics; therefore, the transaction is identified as a Category A expense transaction.

In this Category A expense transaction, the distinct good or service is each handheld radio. Because each performance obligation is satisfied at a point in time—as a result of failing the over time recognition criteria (paragraph 18 in Chapter 5)—the Village would recognize expense at the point in time at which the vendor transfers control of the resources (the radios) to the Village.

Expense would be measured based on the most liquid item; that is, the payable due to the vendor.

The Village would have the following trial balance at June 30, 20X1:

In this case, the inception of the transaction is the Village’s recognition of a payable. The payment for the vendor’s performance is due within one year from the date the payable arises. That is, the payable arises as the radios are delivered to the Village, and the payment contractually is due within three months of that performance. The Village concludes that the transactions are short term.

Because the transactions in this case would be considered short-term transactions, there would be no difference in recognition and measurement of these transactions between the short-term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting.

A School District with a June 30 fiscal year-end employs 1,000 teachers. The School District employs teachers on an at-will agreement basis, which establishes their annual salary of$64,800 for fiscal year 20X2 and that their work schedule is between September and May (the academic year) except for scheduled breaks and weekends (9 months). The conditions of employment also stipulate that the school will make 24 equal bimonthly payments for work performed during the academic year. To simplify this case, the effects of employee and employer payroll taxes, deductions, other compensation, and pay raises are ignored. Payments made in June, July, and August represent consideration for work performed between September and May of the previous school year.

Step 1—Identification of a binding arrangement: Each employment agreement is a binding arrangement. It can be presumed to be enforceable by law. Furthermore, each agreement has economic substance because it is expected to result in a cash outflow for the School District.

Step 2—Identification of mutual assent between parties of capacity: The School District and each teacher approve the terms and conditions of the binding arrangement. The School District and the teacher, by approving the terms and conditions of employment, are bound by the terms of the employment agreement.

Step 3—Identification of substantive rights and obligations of each party: The substantive rights and obligations of each party are identifiable. The teacher has an obligation to perform (to teach) and a right to consideration for their service. The School District has a right to receive resources in the form of the teacher’s service and an obligation to provide consideration.

Step 4—Determination of whether the rights and obligations are interdependent: Both the teacher’s right to receive consideration and the School District’s obligation to provide consideration are dependent on the teacher’s satisfaction of their obligation to perform. The teacher’s performance (provision of services) gives rise to their right to receive consideration. The School District’s right to receive resources results from its obligation to provide consideration.

The transactions in this case include all four characteristics; therefore, the transactions are identified as Category A expense transactions.

In this Category A expense transaction, the distinct good or service is the teacher’s provision of services between September and May. The School District would recognize expense as the teacher satisfies their performance obligation of providing services because the teacher transfers control of the resource to the School District as they perform. Because the School District simultaneously receives and consumes the resources provided by the teacher’s performance, the performance obligation is satisfied over time and expense would be recognized accordingly.

Expense would be measured based on the most liquid item; that is, the payable due to the teacher.

Beginning in September 20X1, the School District would recognize in each bimonthly payroll period of the 9-month academic year a payable and an expense in the amount of $3,600 per teacher ($64,800 ÷ 18). The School District also would disburse payroll payments in the amount of $2,700 per teacher ($64,800 ÷ 24). The payroll payments made in July and August 20X1 constitute a portion of the consideration for work performed between September and May of the previous school year. At the end of the academic year (May 31, 20X2), the School District would have the following trial balance related to those transactions:

Additionally, the School District would make two payroll payments to the teachers in the month of June, and the School District would have the following trial balance at June 30, 20X2:

In this case, the inception of the transaction is the School District’s recognition of a payable. The payments for the teachers’ performance are due within one year from the date the payable arises. That is, the payable arises as teachers perform their obligation, and the payments contractually are due within 12 months of that performance (in 24 equal payments per year). The School District concludes that the transactions are short term.

Because the payroll transactions in this case would be considered short-term transactions, there would be no difference in recognition and measurement of these transactions between the short- term financial resources measurement focus and accrual basis of accounting and the economic resources measurement focus and accrual basis of accounting. It is important to note that there is a financing component in this transaction because the teachers receive compensation for 12 months, but their period of performance is only 10 months. However, the effects of that financing are not significant because the payment terms of the transaction require that the liability be completely satisfied within a 12-month period, despite the fact that the 12-month period does not align with the fiscal period used by the School District for financial reporting purposes.