By Eric Berman
March 15, 2018
The Governmental Accounting Standards Board (GASB) recently released an Invitation to Comment (ITC) asking for comment on ways to potentially improve how revenues and expenses are recognized in state and local government financial reports in the future. An ITC is a first step in a process that will take years to finalize, but it may signal the direction GASB may head.
The current model primarily stems from two standards, both of which codified existing practices that were decades older than when both standards were released. For most grant and taxation-related transactions, GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions (GASB-33) is the primary source of guidance, released in 1998. Other limited guidance is found in GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, (GASB-62) released in 2010. However, some of the latter’s guidance stemmed from very old FASB and AICPA guidance. So the practices we are using today are many decades old even though non-state and local government practices and systems have continued to evolve.
The goal of the ITC is to receive stakeholder feedback on developing a comprehensive model for revenue and expense recognition for state and local governments. Two potential models are discussed. However, there is a potential for additional models that stakeholders may desire to be explored.
Questions are included on each model. Feedback is due on April 27 to GASB staff. Three public hearings are scheduled: May 6 at the Government Finance Officers Association annual conference in St. Louis, May 18 in Burlingame, Calif. (near San Francisco), and May 30 at the GASB’s offices in Norwalk, Conn.
Model 1: The Exchange / Nonexchange Model
In the exchange/nonexchange model, the initial determination of how to record the revenue or expense is based on whether or not an exchange occurred. The type of transaction is then based on whether earnings (and value exchanged) have occurred. This is largely the current model contained in GASB-33 and GASB-62.
As discussed in GASB-33, exchange transactions are those in which each party receives and gives up essentially equal values. Nonexchange transactions are those in which a government gives or receives value without directly receiving or giving equal value in exchange. Most of us know nonexchange transactions as those relating to taxes and grants.
Exchange transactions are relatively easy to understand. Value is based on cost, but also can include many other characteristics. For example, in a sale of water from a utility, there are costs that are part of a rate per gallon or some other measure. The rate is charged and billed to the customer—ostensibly equal values.
This becomes difficult in the case of permitting. A developer could obtain a building permit from a government to construct a development on a plot of land for a relatively small amount of money. The permit is vital to the developer because without it, the development may never be built. Once obtained and the buildings are built, the developer may gross hundreds of thousands of dollars on the sales of the properties, if not much more. It is unclear if the government received equal value in the transaction beyond the ability to oversee or regulate the project. Yet, the common transaction of issuing a permit is an exchange transaction.
Model 2: Performance Obligation / No Performance Obligation Model
In contrast to the exchange/nonexchange model for revenue and expense recognition, the performance obligation/no performance obligation model depends on the existence of a binding arrangement between the participants in the transaction. In other words, is the government bound to do something in exchange for compensation? Or, is the entity that the government is transacting with required to do something in exchange for payment from the government?
In a performance obligation, there is usually a binding arrangement—a contract. In some cases, the contract may not be formal, only an expectation of service. For example, if someone is acutely ill and the government provides ambulance services, the citizen calls 911, the ambulance rushes to where the citizen is and delivers the citizen to the nearest hospital. There is no real contract between the citizen and the government providing the service, other than the expectation to provide the service. However, the arrangement must be legally enforceable with rights and obligations that are essentially equivalent. To continue the example, the ambulance service would generate a bill from the government, some of which may be paid by insurance while the remainder is paid by the citizen. If the citizen does not pay, there is likely an enforceable lien placed on the citizen.
If there is an obligation and service provided, revenue (and expense) may be generated, even though the receipt or payment may be deferred. It is too early in the GASB’s process to determine whether deferred inflows of resources or deferred outflows of resources may occur for a lengthy period before payment. But at the very least, a receivable may exist for the service of rushing the patient to the hospital and a payable/outflow for the expense of the ambulance team and the supplies consumed.
Could the current model based on exchange and nonexchange transactions carryforward without change? Perhaps. But for many practitioners, the recognition of taxes and grants is difficult at best due to eligibility and timing requirements.
For-profit and not-for-profit entities are the in the midst of converting their revenue and expense recognition provisions to the performance obligation model. Could this model be ultimately used for government? Maybe, but what do you do about taxes? Maybe a hybrid of both will emerge.
We’d like to hear your ideas as we prepare to participate in the outreach process with the GASB. If you’d like to discuss this with us, please contact an Eide Bailly professional at any time.