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Risks and Uncertainties Disclosures


Minutes of Videoconference Meetings, February 1, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing the descriptive components of the two approaches (uncertainty approach and risk approach) to the potential category of significant estimates.
 
For the uncertainty approach, the Board tentatively decided to seek user feedback on the proposal that this category be described as an uncertainty based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements. The Board then discussed the circumstances in which a disclosure for an uncertainty would be made. The Board tentatively decided to seek user feedback on the proposal that a disclosure for an uncertainty would be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is more likely than not that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change in estimate as reflected in the relevant assets, liabilities, inflows, outflows, or other disclosures would be significant.
 
The Board then considered the descriptive components of the risk approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on the proposal that this category be described as a risk to a government based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements. The Board then discussed the circumstances in which a disclosure for a risk would be made. The Board tentatively decided to seek user feedback on the proposal that a disclosure for a risk would be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is reasonably possible that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change will have a substantial impact within 2 to 3 years from the date of the financial statements.
 
The Board considered at what level of a government’s reporting entity an uncertainty or risk related to the potential category of significant estimates should be disclosed. The Board tentatively decided to seek user feedback on the proposal that the disclosure of an uncertainty or risk related to the potential category of significant estimates under both approaches would be at the level of the primary government, unless the effect of the uncertainty or risk is substantially different for a reporting unit(s) and, therefore, should be disclosed at the reporting unit level.
 
The Board also discussed the examples to be developed for the proposed guidance on disclosures for the uncertainty or risk approach related to the potential category of significant estimates. The Board tentatively decided to seek user feedback on the proposal that risks and uncertainties that meet the description of these two approaches be disclosed with clarification provided through the use of specific examples to include (1) cost of municipal landfill closure and postclosure care, (2) uncollectible amount of accounts receivable, (3) loss contingency associated with a lawsuit, (4) contingent liability associated with an obligation of another entity, and (5) asset retirement obligation associated with contamination.
 
The Board then deliberated the criterion of substantial impact for the risk-based categories, including the risk approach, and tentatively decided to seek user feedback on the proposal that for the categories of current vulnerabilities due to concentrations and government environment a substantial impact be described as one that affects the government’s ability to (1) continue to provide services at the level of the current reporting period or (2) meet its obligations as they come due.
 
The Board continued by considering the objective of disclosures for the uncertainty approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on whether the objective of disclosures for the uncertainty approach should be to provide essential information to users of government financial reports about an elevated level of variability in a particular recognized or disclosed estimated amount.
 
Lastly, the Board discussed the objective of disclosures for the risk approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on whether the objective of disclosures for the risk approach should be to provide essential information to users of government financial reports about risks faced by those governments that may impact the government’s ability to continue to provide services or meet its obligations as they come due. 

Minutes of Videoconference Meetings, January 1214, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing general descriptions for the categories of current vulnerabilities due to certain concentrations and the government environment, as well as for the potential category of significant estimates.
 
Next, for the category of current vulnerabilities due to concentrations, the Board tentatively decided to seek user feedback on the proposal that risks that meet the description of this category and the limitation thresholds be disclosed with clarification provided through the use of specific examples of potential concentration risks. These examples will tentatively include (1) principal employers; (2) principal industries; (3) principal resource providers; (4) composition of principal resources; (5) labor (such as collective bargaining arrangements or percent of unionized workforce); and (6) external suppliers of material, labor, or services (for example, incarceration facilities with third-party staffing.) With respect to the category of government environment, the Board tentatively decided to seek user feedback on the proposal that all risks that meet the description of the category and the limitation thresholds be disclosed with clarification provided through the use of specific examples, including (a) restrictions on raising revenue, (b) expense restrictions (such as debt covenants), (c) inflexibility in reducing expenses (such as unfunded mandates), and (d) limits on incurrence of debt that are externally imposed.
 
The Board then discussed the potential category of significant estimates and tentatively decided to seek user feedback on alternative descriptions of that potential category. Those alternatives will be further refined at the February Board videoconference.
 
The Board also discussed disclosure objectives related to the categories of current vulnerabilities due to certain concentrations and the government environment. The Board tentatively agreed to seek user feedback on the objective of the proposed disclosures developed for those categories: to provide essential information to users of government financial reports about risks and uncertainties faced by those governments that may impact the government’s ability to continue to provide services and meet its obligations as they come due. Whether the estimates category will be addressed in the objective will be discussed at a future meeting after feedback is received as part of the additional user outreach effort.

Minutes of Videoconference Meetings, December 13, 2020
 
The Board began the deliberations of the Risks and Uncertainties Disclosures project by discussing the scope of the project. The Board tentatively decided that the scope of the project should be limited to certain categories of risks and uncertainties disclosures. The Board then discussed whether disclosures related to the category of current vulnerabilities due to certain concentrations should be included in the scope of the project. The Board tentatively decided that disclosures related to a government’s current vulnerabilities due to certain concentrations should be included in the scope of the project. The Board continued the discussion by considering whether disclosures for risks and uncertainties related to the category of significant estimates should be included in the scope of the project and tentatively decided that project staff should conduct additional user outreach in the area of significant estimates before a determination of whether this topic should be included in the scope of the project is made. Next, the Board discussed whether disclosures for risks and uncertainties related to the category of the government environment should be included in the scope of the project. The Board tentatively decided that disclosures related to the government environment should be included in the scope of the project.
 
The Board continued deliberations by considering the appropriate level of detailed requirements to develop for the proposed note disclosures related to the categories in the scope of the project. The Board tentatively decided to develop risks and uncertainties disclosure requirements within the described categories and to accompany the proposed requirements with examples.
 
The Board discussed various limitations to be considered by governments in their determination of which risks and uncertainties to disclose for the categories in the scope of the project. The Board tentatively decided to propose that for the categories of current vulnerabilities due to certain concentrations and the government environment, disclosures be required when the government determines that it is “reasonably possible” that an event associated with the risk or uncertainty will occur 12 months beyond the financial statement date or shortly thereafter (3 months) and that event will have a “substantial impact” within 2 to 3 years of the date of the financial statements.
 
Next, the Board considered at what level of a government’s reporting entity risks and uncertainties in the scope of the project should be disclosed. The Board tentatively decided that proposed disclosures for risks and uncertainties in the categories of current vulnerabilities due to certain concentrations and the government environment should be presented for the primary government, including its blended component units, unless the risk profile is substantially different for a reporting unit(s) and, therefore, should be disclosed at the reporting unit level.
 
The Board also discussed the examples to be developed for the proposed guidance on disclosures related to current vulnerabilities due to certain concentrations. The Board tentatively decided to include (a) principal employers; (b) principal resource providers; (c) labor; (d) external suppliers of material, labor, or services; and (e) principal industries as proposed examples. Lastly, the Board discussed examples to be developed related to proposed disclosures for risks and uncertainties related to the government environment. The Board tentatively decided that the proposed examples should include (1) restrictions on raising revenue and (2) expense restrictions.

Minutes of Videoconference Meetings, October 20–22, 2020

The Board discussed potential approaches and limitations to the disclosure of risks and uncertainties. No tentative Board decisions were made.

Minutes of Videoconference Meetings, September 8–10, 2020

The Board began deliberations by discussing the user outreach and literary research conducted related to risks and uncertainties disclosures. Board members provided general observations and additional considerations for the project moving forward, including certain limitations that would apply to these disclosures. 

The Board continued by discussing whether to require a disclosure addressing the general nature of operations of a government. The Board tentatively decided that a disclosure that addresses the general nature of operations of a government should not be proposed to be required.

The Board then discussed whether to require a disclosure that broadly describes the use of estimates in the preparation of governmental financial statements. The Board tentatively decided that a disclosure that broadly acknowledges the use of estimates in the preparation of governmental financial statements should not be proposed to be required.

Lastly, the Board discussed two alternatives of a note disclosure related to certain significant estimates. The Board tentatively decided to propose alternative two, which was a broader approach in the description of the category. Additionally, the Board tentatively decided that the note disclosure requirement proposals related to the use of significant estimates should include specific qualifications or limitations.

Minutes of Videoconference Meeting, July 6, 2020
 
The Board considered a project prospectus related to a proposed project on Risks and Uncertainties Disclosures. The Board discussed issues related to the project scope and agreed to add the project to its current technical agenda. The Board also agreed that the issues identified within the prospectus should be addressed by the project.  
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