Journal Entries

This recurring website feature highlights articles from The GASB Report, the GASB’s monthly newsletter. The current article appeared in the August 2011 issue.

GASB Issues Exposure Draft Identifying Specific Deferred Outflows and Deferred Inflows of Resources

At the August meeting, the GASB approved an Exposure Draft of a proposed Statement, Reporting Items Previously Recognized as Assets and Liabilities, that proposes reclassifying certain items currently reported as assets and liabilities.

There is a clear and growing need for guidance addressing items that appear to meet the definition of deferred outflows of resources and deferred inflows of resources as they appear in Concepts Statement No. 4, Elements of Financial Statements, but are not specifically identified as such throughout the GASB’s authoritative literature.

Concepts Statement 4 identifies consumptions and acquisitions of net assets related to future periods as deferred outflows of resources and deferred inflows of resources, respectively. Because the Concepts Statement explicitly specifies that recognition of deferred outflows and deferred inflows should be limited to those instances identified in GASB authoritative pronouncements, guidance is needed to determine which of these items—for example, deferred charges and deferred revenues—should be reported as deferred outflows of resources or deferred inflows of resources rather than as assets or liabilities.

Currently, two GASB pronouncements require the recognition of deferred inflows of resources and deferred outflows of resources. Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, requires the recognition of deferred outflows of resources and deferred inflows of resources in certain cases. That Statement provides for the deferral of changes in the fair value of hedging derivatives, for example.

Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, which will become effective for financial statements for periods beginning after December 15, 2011, also will require the recognition of deferred inflows of resources in specific situations. That Statement requires the deferral of certain up-front payments a government receives from an entity it has contracted with to operate a major capital asset, such as a toll road or hospital, for example.

GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, which also will become effective for financial statements for periods beginning after December 15, 2011, provides financial statement presentation guidance for these elements; however, it does not identify any additional items that should be recognized within these element classifications. Statement 63 only will apply to items that have been specifically identified by the GASB as deferred outflows of resources or deferred inflows of resources.

Project deliberations that resulted in the issuance of the Exposure Draft examined the existing GASB literature for items that could potentially meet the criteria for recognition as deferred outflows of resources and deferred inflows of resources. As a result of the Board’s deliberations, some assets would continue to be classified as assets, others would be recognized as deferred outflows of resources, and still others would be recognized as outflows of resources. Similarly, some liabilities would continue to be classified as liabilities, others would be recognized as deferred inflows of resources, and still others would be recognized as inflows of resources.

The following is a list of some examples of the classification of the items based on the decisions reached by the Board:

Transactions in which the resulting item should continue to be reported as an asset

• Resources advanced to another government in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than a time requirement has not been met (Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions)
   
• The purchase of future revenues from a government outside the financial reporting entity (Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues)

Transactions in which the resulting item should be reported as a deferred outflow of resources

• Resources advanced to another government in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when a time requirement is the only eligibility requirement that has not been met by the other government (Statement 33)
   
• Deferred debit amounts resulting from the refunding of debt (Statements No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements)

Transactions in which the resulting item should be reported as an outflow of resources

• Acquisition costs for insurance entities and public entity risk pools (Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and Statement 62)
   
• Debt issuance costs (Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, and Statement 62)

Transactions in which the resulting item should continue to be reported as a liability

• Resources received in advance in relation to a derived tax revenue nonexchange transaction (Statement 33)
   
• Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than a time requirement has not been met (Statement 33)
   
• Resources received in advance of an exchange transaction (Statement 62)

Transactions in which the resulting item should be reported as a deferred inflow of resources

• Resources received in advance in relation to an imposed nonexchange transaction (Statement 33)
   
• Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when time requirements are the only eligibility requirement that has not been met by the receiving government (Statement 33)
   
• Deferred credit amounts resulting from the refunding of debt (Statements 23 and 62)

Transactions in which the resulting item should be recognized as an inflow of resources

Net balance (credit) of loan origination fees:

• Excluding any portion related to points related to lending activities (Statements 10 and 62)
   
• Excluding any portion related to points for mortgage loans held for investment (Statement 62)
   
• Including any portion related to points for mortgage loans held for resale after the sale occurs (Statements 10 and 62)

If the requirements of this proposed Statement ultimately become final, they would improve financial reporting by standardizing the use of deferred outflows of resources and deferred inflows of resources in financial statements. In addition, uncertainty regarding the classification of items that may seem to meet the definition of a deferred outflow of resources or a deferred inflow of resources would be diminished.

Proposed Effective Date

The requirements of this proposed Statement would be effective for periods beginning after June 15, 2012, with earlier application encouraged.

How to Obtain Copies of the Exposure Draft

Copies of the Exposure Draft may be downloaded free of charge from www.gasb.org. The comment deadline is November 18, 2011. Additional details on how to provide comments to the GASB on this proposal are available in the front of the Exposure Draft.