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New revenue, expense recognition considerations Part II

performance obligation model, revenue and expense recognition, government accountingGASB is looking to address expanded guidance on revenue for classification and recognition through either the Exchange/Non-Exchange Model or the Performance/No-Performance Obligation Model. This blog will provide a brief overview of the Performance Obligation Model. If you missed our post on the Exchange Model, click here.

Performance Obligation Model

The Performance Obligation Model classifies a performance obligation as using a binding arrangement to another party that promises to provide distinct goods or services to a specific beneficiary.

  • Binding arrangement: a legally enforceable mutual understanding between two or more parties regarding their identifiable rights and obligations.
  • Another party: any separate entity that takes part in a transaction with a government (such as a customer, resource provider, vendor or employee).
  • Distinct goods or services: separately identifiable (or bundled) and can provide benefits on their own (or in a series).
  • Specific beneficiary: the party that receives the goods or services provided and that can be distinguished from the public (like an individual, entity, government, or a group of entities or individuals).

If the obligation does not meet the definitions above, it would be considered a No-Performance Obligation transaction.

The Performance Obligation Model identifies the amount of the payment, whether one or multiple performance obligations exist, and then recognizes when the obligations are satisfied either at a point in time or over time (and by portion if there are multiple obligations).

Currently this model is challenged by its conceptual nature as some of these items may be more difficult to identify in practice.

You can see further examples and specific information in the Invitation to Comment. Final comments must be submitted by April 27, 2018.

Corey McFarland