Primary Objective: This project addressed financial reporting for sales and pledges of receivables and future revenues, including sales and pledges of property tax receivables.
Status: Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues was issued on September 29, 2006.
Sales and Pledges of Receivables and Future Revenues—Project Plan
Project Description: Initially, the objective of this project was to address financial reporting for securitizations, including “securitization-like” transactions, and other transfers (other transfers may include pledged revenue streams) entered into by state and local governments. During its early deliberative sessions, the Board agreed that the focus of the project should be sharpened to address financial reporting for sales and pledges of receivables and future revenues. Securitizations and securitization-like transactions would remain within the scope of the newly-focused project. Also, the Board acknowledged that it may be appropriate to reexamine certain aspects of Statement No. 14, The Financial Reporting Entity, for situations in which a government pledges its revenues as security for the debt of a discretely presented component unit.
Background: This project was initially proposed for addition to the technical agenda largely as a reaction to comments made to the Board during the due process related to Technical Bulletin No. 2004-1, Tobacco Settlement Recognition and Financial Reporting Entity Issues. The Board was urged by some constituents to broaden the scope of that project to include all securitizations and securitization-like transactions, rather than proceed with a focus only on the tobacco settlement issues. The Board believed, however, that issuance of timely guidance on the tobacco settlement issues was a priority and agreed that other, similar issues would be addressed in a broader-scope project.
This project represents that broader-scope approach. Currently, for transactions within the governmental activities category, the provisions of FASB Statement No. 77, Reporting by Transferors for Transfers of Receivables with Recourse, would be used to determine if a transaction is a sale or a collateralized borrowing. In addition, EITF 88-18, Sales of Future Revenues, addresses certain debt versus deferred revenue issues. Both of those pronouncements have been superseded subsequent to November 1989. On the other hand, enterprise funds and BTAs that elect the option in paragraph 7 of Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, would be required to apply the provisions of FASB Statement No. 140, rather than the superseded Statement 77, which would be used by enterprise funds and BTAs that do not make the election.
The objective of this project is to provide for consistent measurement and recognition across governments and within individual governments by developing government-specific guidance that would be applicable to both governmental and business-type activities. Additionally, the Board intends to determine whether additional disclosures about the pledge and sale transactions addressed in this project are needed.
“Sales” of delinquent property taxes: The sale of delinquent property tax liens—either as individual parcels or in bulk sales—has been a fairly common occurrence for local taxing bodies in many states for decades. Transactions that often are characterized as securitizations, however, represent a relatively recent phenomenon. In a direct sale of tax liens (where permitted by state law), a local government taxing body sells tax liens directly to a purchaser in exchange for cash. In a transaction that often is referred to as a “tax lien securitization,” the government sells its tax liens to a special-purpose trust, or another special-purpose entity created by the government itself or by its respective state. The trust then issues securities to investors in the form of bonds or senior notes. The bonds or notes are issued at a calculated percentage of the total value of the delinquent taxes with the proceeds of the issuance paid directly to the government (except for any required reserves). Typically, the trust also issues a subordinate note to the government representing the remaining percentage of the total value of the tax liens transferred. The bonds and senior notes are repaid, with interest, from the collections of the delinquent taxes (and interest and penalties, if applicable). The government receives cash for the subordinate note only after the senior debt is repaid.
Other receivables involved in securitizations or securitization-like transactions: Delinquent property taxes appear to be the most common type of receivable that local governments would have available for securitization, although it is likely that other types of delinquent receivables or payments in arrears—such as unpaid fees and fines or deferred state grant or entitlement payments, if significant—could also make up an asset pool to be sold or pledged. Sales of mortgages in the public housing or housing finance arena, sales of student loans in higher education, and the securitization of stranded costs in the public utility industry may also need to be considered in this project.
Sale or pledging of future revenues: Although sales of future revenues may occur in government, the more likely scenario that is also covered within the scope of this project is the pledging of future revenues as security for debt. In addition to the typical revenue bond scenario, other examples of pledged revenues include a wide variety of state and local taxes, grants and entitlements, lease revenues, and payments in lieu of taxes.
Accounting and Financial Reporting Issues:
Scope: The Board has tentatively concluded that the project scope should include both sales and pledges and should focus on both receivables and future revenues.
Recognition and measurement: The central issue is likely to be whether a transaction involving the transfer of future rights or benefits regarding receivables or future revenues should be reported as a sale or as a collateralized borrowing, in which the receivables or revenues are “pledged,” rather than sold. When these transactions occur between a primary government and a blended component unit, the result of the financial reporting in either case is akin to that of a collateralized borrowing (or the issuance of pledged revenue debt). When the transactions occur between a government and an organization outside of its reporting entity (or with a discretely presented component unit), the question of sale, pledge, or borrowing is not automatically answered and needs to be addressed. In general, asset, revenue/gain, liability, and expense/loss measurement and recognition questions will need to be considered for both sides of a sale or pledge transaction. As the Board observed during the Tobacco Settlement project deliberations, these issues can be quite perplexing, especially when dealing with future resource streams and assets that do not meet the criteria for financial statement recognition.
Disclosures: What disclosures may be necessary to adequately inform users about sales and pledges of receivables and future revenues? The Board will consider the extent to which detailed information about sales and pledge arrangements should be provided in the notes to financial statements.
Reporting Entity Issues: Sometimes a legally separate entity is created by a government to issue debt and/or to serve as the “acquiring” party in a sale. As the Board discovered during the Tobacco Settlement project, the reporting entity include/exclude decision and the blending/discrete presentation decision can be made by applying the relevant provisions of Statement No. 14, The Financial Reporting Entity, as amended. However, some Board members at the time and respondents to the proposed TB believed that the requirements for blending in Statement 14 may need to be amended. The characteristics of the legally separate entities will be examined to determine if there are common attributes that would justify a requirement to blend those component units.
The focus of the initial research has been on the following major issues:
At the July 2004 meeting, the staff presented the Board with an overview of the research results to date with an emphasis on the sales or securitization of delinquent property taxes. Other types of revenues that have been, or could be, pledged or securitized were also discussed at a general level.
At the October meeting the Board agreed that the project title should be modified to more accurately describe the project scope. A new title, Transfers and Pledges of Receivables and Future Revenues, was proposed, but the Board urged the staff to find a term other than Transfers, because the term already has a well-understood meaning in governmental accounting. The Board also continued its discussions about sales and pledges of delinquent property tax liens and reached several tentative conclusions which may also apply to sales and pledges of other types of receivables, pending further research. Those conclusions include:
At the November meeting, the Board shifted its focus from receivables to future revenues and discussed both pledges and sales. Again several tentative conclusions were reached, including:
At the January 2005 meeting, the Board discussed potential disclosures relative to governmental activities’ revenues (for example, taxes, grants, etc.) that are pledged as security for debt issued by the pledging government or its component units. The Board also discussed whether this standard should include guidance that would amend the blending requirements in Statement 14, but agreed to defer that issue until the broader scope reexamination of Statement 14 takes place.
At the February meeting, the Board evaluated the pros and cons of following either a “risk and reward” approach or a “control” approach in devising criteria that would be used in assessing whether a transaction should be reported as a sale or as a collateralized borrowing. The Board tentatively decided to follow a control approach because it is more consistent with the current thinking in the Elements concept statement project.
At the April meeting, the Board reviewed its tentative decisions as they would be presented in the standards section of a proposed Statement. Discussions continued at the May meeting. Tentative conclusions reached by the Board at the May meeting included:
In June, the Board discussed the first version of a pre-ballot draft of the proposed standard. The Board agreed that the issues associated with reporting intra-entity sales of future revenues needed further development for consideration at the next meeting. At the August 2005 meeting, the Board concluded that the revenue from all intra-entity future revenue sales should be deferred and as a result, the conditions stipulated in the draft for immediate recognition should therefore not apply to intra-entity transactions.
The Exposure Draft was posted to the GASB Website on September 30. The comment period ended on December 30, 2005.
The Board discussed the respondent comments at the April, May/June, and July regular meetings, and reviewed the pre-ballot draft during the July 31 teleconference. Results of those deliberative sessions were:
Sales and Pledges—Recent Developments
Minutes of Meeting, August 29-31, 2006
The session began with a brief discussion of the staff paper regarding alternatives for the transition requirements for the provisions of the standard that would apply to sales of future revenues. The Board reaffirmed its earlier decision to allow for prospective application. The Board then reviewed the ballot draft of the final Statement and unanimously approved its issuance, but it asked the staff to add a paragraph to the Basis for Conclusions about the transition issue. Later in the meeting, the Board reviewed and approved this paragraph.
Minutes of Meeting, July 31, 2006 Teleconference
The Board (Board members Williams and Holder did not participate due to technical difficulties) reviewed the preballot draft, including two issues presented by the staff in the transmittal memo. On the first issue, the Board agreed with the staff recommendation to add specific references to future revenues in several places in the draft where that term appeared to be covered by the broader reference to assets (for example, intra-entity transfers of assets). The Board agreed to temporarily table the second issue about establishing a specific implementation date for sales of future revenues until next month. The Board suggested a few editorial changes and clarifications throughout the draft but made no substantive modifications. The staff will prepare the ballot draft for discussion at the August meeting.
Minutes of Meeting, July 11-13, 2006
The Board began its deliberations by reviewing the tentative decision made at the last meeting to exclude guidance for recognizing and reporting revenues/gains from transactions that met criteria to be considered sales of future revenues. After an extended discussion, the Board reconsidered the earlier decision and instead agreed to tentatively adopt the guidance that was proposed in the Exposure Draft (including any modifications made in response to due process input). To address concerns raised by some respondents to the Exposure Draft, the Board tentatively agreed to amend the effective date and transition paragraph to provide for prospective application of the requirements that pertain to sales of future revenues. The Board believes that by allowing for prospective implementation, those governments that followed the guidance in Technical Bulletin No. 2004-1, Tobacco Settlement Recognition and Financial Reporting Entity Issues, would not be required to restate net assets and fund balances that would result by retroactively applying the revenue deferral provisions in the proposed Statement.
Minutes of Meeting, May 31–June 2, 2006
The Board deliberated several issues in the staff paper, primarily the active involvement criteria related to future revenues, accounting for sales of future revenues in governmental funds, and other issues not discussed in prior meetings. The paper included several recommendations advocating no change to specific provisions and some that recommended clarifications to the way in which certain provisions were explained or illustrated. The Board agreed with all recommendations of that nature. The paper also included discussions and recommendations that would result in more substantive modifications or clarifications. The Board tentatively agreed with the following:
Minutes of Meeting, April 18-20, 2006
The Board deliberated several issues in the staff paper, primarily related to provisions in the Exposure Draft (ED) that relate to sales and pledges of future revenues. The paper included several recommendations advocating no change to specific provisions and some that recommended clarifications to the way in which certain provisions were explained or illustrated. The Board agreed with all recommendations of that nature. The paper also included discussions and recommendations that would result in more substantive modifications or clarifications. The Board tentatively agreed with the following staff recommendations.
The Board spent a significant amount of time discussing the active involvement criteria as it would be applied to several different types of future revenues (including tobacco settlement revenues), and it ultimately agreed to postpone a decision until after the discussion scheduled for the next meeting about the proposed accounting and reporting in governmental funds. The staff was asked to attempt to strengthen and clarify the criteria as proposed in the ED to provide for a more discriminating distinction between active involvement in the generation of future revenues and involvement related to those revenues that should not be considered active.
Minutes of Meeting, March 7-9, 2006
The project staff presented their issues paper, which summarized the comments received on two specific areas of the Exposure Draft—scope and applicability, and transition. The Board first discussed several concerns regarding the scope and applicability of the proposed standard and tentatively agreed with and supported the staff’s recommendations and conclusions. Specifically:
With regard to the transition issues, specifically the requirement for retroactive applicability, the Board agreed to table the question until the April meeting. At that time, the Board will have had the opportunity to consider and discuss the concerns about the proposed accounting for sales of future revenues.
Minutes of Meeting, September 20-22, 2005
The Board reviewed and discussed a ballot draft of the proposed Exposure Draft and asked the staff to make several editorial or wording modifications, but did not make any substantive changes to the draft. The Board also approved for inclusion in the Exposure Draft two illustrations that provide a narrative explanation of the accounting for a sale of future revenues and a sale of receivables. After reviewing an updated ballot draft, the Board unanimously voted in favor of proceeding with the issuance of the Exposure Draft.
Minutes of Meeting, August 9-11, 2005
The Board opened the discussion with comments about the alternatives offered in staff issues paper 1. That paper was prepared at the Board’s request to serve as a basis for evaluating different solutions to a financial reporting issue that arose during the June deliberations. Because the Board had tentatively agreed to require the deferral of revenue resulting from an intra-entity sale of the rights to future revenues, the treatment of the outflows by the transferee (the purchasing component unit) needed to be determined in a manner that would retain the neutrality of the internal transaction. After debating each of the alternatives presented in the paper, the Board tentatively agreed that the outflow by the transferee government would be recognized as a deferred charge to be amortized over the duration of the agreement. When consensus was reached on the deferral issue, the Board discussed the preballot draft and suggested several wording, composition, and editorial modifications, but did not make any substantive changes to the guidance proposed in the draft. The Board is scheduled to review a ballot draft at the next meeting.
Minutes of Meeting, June 21-23, 2005
The Board began its initial review of a preballot draft of an Exposure Draft on the topic. Several changes to wording and structure were discussed and agreed upon. The two most notable structural changes suggested were (1) to rearrange the criteria for evaluating potential sales of receivables in paragraph 6, with the manifestations of isolation moved to a new following paragraph, and (2) a similar reconfiguration of paragraph 7 regarding potential sales of future revenues, with a separate paragraph created for the conditions used to determine active or passive continuing involvement.
The Board then discussed reporting intra-entity sales of future revenues and agreed that the issues needed further development for consideration at the next meeting. The Board tentatively concluded that the revenue from all intra-entity future revenue sales should be deferred and, as a result, the conditions stipulated in the draft for immediate recognition should therefore not apply to intra-entity transactions. The staff was asked to develop an analysis of several alternatives for reporting, from a purchasing component unit’s perspective, the payment of its debt proceeds to the related selling government, given that deferred revenue scenario. The Board also requested that the issues paper address the possibility of modifying the proposal to provide that all intra-entity transfers of the rights to future revenues be reported as a collateralized borrowing, with no provisions for sales treatment. The Board will discuss the issues paper and continue its review of the pre-ballot draft at the August meeting.
Minutes of Meeting, May 17–19, 2005
The Board began the session by reviewing the changes that had been made to the draft Statement as a result of Board input at the April meeting. The Board agreed to make several additional editorial changes, but also concluded that certain substantive modifications were also in order. In summary, the Board tentatively agreed that:
The Board will continue its deliberations and discuss an updated draft at the June meeting.
Minutes of Meeting, April 5–7, 2005
The staff paper distributed to the Board for this month’s deliberations presented all the tentative conclusions reached at previous meetings in a format that resembles the Standards section of a final Statement. The Board provided several editorial and wording changes in various sections of the document and also agreed on some substantive changes to certain proposals.
The Board tentatively agreed that it was not necessary to include a discussion of the intent of the parties and the terms of a transfer agreement as an initial consideration in determining whether proceeds received by a transferor government should be reported as revenue or as proceeds from a collateralized borrowing. The specific criteria that would be used to make that sale or borrowing determination were discussed, and the Board generally accepted the criteria as presented in the paper. The paragraphs in the paper that proposed the accounting treatment for transactions that do not qualify as sales and how those transactions should be reported were discussed at length. The Board disagreed with the methodology proposed in the body of the paragraphs, and instead tentatively concluded that the alternative approaches presented as addendums to those paragraphs should be followed.
The Board engaged in a long discussion about revenue or gain recognition for sales transactions. No conclusion was reached; the issue will be addressed again at a future meeting. Due to the limited time available, the Board was able to begin a discussion of other assets and liabilities arising from a sale but was not able to reach conclusions about the proposals regarding those issues.
Minutes of Meeting, February 22–24, 2005
The focus of the staff paper presented to the Board was on the factors that might be considered when making a decision about whether proceeds received by a government in exchange for the future cash flows from receivables and future revenues constitute a borrowing or revenue. At the outset of the discussion, the Board tentatively agreed with the staff’s recommendations, including:
The majority of the session was spent discussing the pros and cons of basing decision-making factors on either a risks and rewards concept or a control theory. The Board discussed the individual factors that may be included in the two approaches and tentatively agreed with the staff’s recommendation that a control approach was the more appropriate of the two. The staff pointed out that the current thinking both in the private sector and internationally is to move away from a risk/reward perspective toward one that examines the level of control. Other potential concerns and possible ambiguities that might arise if a risk/reward approach were taken were discussed and influenced the Board’s decision.
The Board tentatively agreed with the staff’s belief that it is the close relationship to the Elements project (that is, the developing definitions of assets, liabilities, and so forth) that points in the direction of a control approach. Control is a main component of the Board’s tentative definition of assets (however, definitions of other critical elements have not yet been explored), whereas exposure to risk or opportunity for gains is not expressly included in that definition, although some aspects of a risk/reward concept may also be considered in assessing control. The Board concurred with the staff’s observation that it will be important going forward to continue to monitor how the conclusions reached in this project—about recognizing and reporting assets, liabilities, and net inflows of resources arising from a sale or borrowing transaction—coincide with the evolving definitions in the Elements project. Also, monitoring from the opposite perspective will be equally important—that is, how do the developing definitions in the Elements project affect the tentative conclusions in the Sales and Pledges project.
Minutes of Meeting, January 11–13, 2005
The session began with a revisit of an earlier discussion about the project’s title. After a brief exchange, the Board tentatively agreed with the staff recommendation to change the title to “Sales and Pledges of Receivables and Future Revenues.” Next, the Board reviewed the tentative decisions reached at the October and November meetings and reaffirmed their initial conclusions.
The first new issue addressed by the Board was the question of whether some level of disclosures about pledged revenues should be required. The Board tentatively agreed with the staff’s recommendation that at a minimum, the notes should identify the revenues that are pledged, the purposes for which they are pledged, the duration of the commitment, and some measure of the relationship of the pledged portion to the total revenue. The second issue addressed was whether the Board believed that the blending requirements in paragraph 53 of Statement No. 14, The Financial Reporting Entity, should be amended to eliminate certain inconsistencies in the way some governments include comparable component units. After considerable discussion, the Board tentatively agreed that consideration of the issue should be postponed until the broader-scope reexamination of Statement 14.
Sales and Pledges of Receivables and Future Revenues—Major Tentative Decisions to DateStatement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues were approved in September 2006.
Sales and Pledges of Receivables and Future Revenues—Relevant Links