In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued a standard on recognition of revenue from contracts with customers (FASB Codification Topic 606). For entities that follow the FASB financial reporting standards, the new guidance required: 1) the identification of performance obligations, or promises, made by a covered reporting entity in a contract with a customer; 2) the allocation of the transaction price to the obligation; and 3) the recognition of revenue when, or as, the reporting entity satisfies the performance obligations.
Fast forward nearly four years and that private-sector guidance, once delayed and twice modified, is becoming effective for the first (publicly traded) companies for fiscal years and interim reporting periods beginning after December 15, 2017. And something else is happening: the Governmental Accounting Standards Board (GASB) is testing the waters for a possible move in the same direction.
In January 2018, GASB issued an invitation to comment (ITC), Revenue and Expense Recognition, which addresses such recognition in accrual-based financial statements. (1) In the ITC, GASB suggests two possible paths to follow in refining revenue recognition. The first option is to build a comprehensive reporting model around the current exchange/nonexchange dichotomy, while the second tries on a performance obligation model for size. (2)
What might be gained by moving away from something familiar toward something new? A few things. To start with, the presence of performance obligations in many grant arrangements could add a more intuitive logic to identifying when grant revenue is recognized. (3) More significant, however, is that the use of a performance obligation approach in government accounting would mirror the approach used in private-sector accounting, aligning the approach used by GASB with the approach used by FASB. Alas, it would not render government financial statements suddenly recognizable by those familiar only with private-sector reports, but it could be one accounting principle that translates easily from private-sector accounting--which is emphasized in college and university curriculums and is familiar to most experienced accounting professionals --to government accounting, making it easier for those largely experienced with private-sector accounting to transition into public service.
Precedents support common ground between...