Risks and Uncertainties Disclosures
Certain Risk Disclosures I & II
Project Description: The objective of this project is to identify potential risks and uncertainties in the state and local government environment and to consider developing disclosure requirements associated with those risks.
Status:
Exposure Draft Comment Period
Background: General disclosure guidance in FASB Accounting Standards Codification® (ASC) Topic 275, Risks and Uncertainties, requires a nongovernmental entity to disclose risks and uncertainties relating to the nature of its operations, its estimates, and vulnerability due to certain concentrations. (Topic 275 primarily is derived from AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, which was issued in 1994.) For some governmental entities, the long-term impacts of the COVID-19 pandemic might be felt across each of those categories. However, the potential need for this information by users of financial statements extends beyond the effects of the pandemic.
The three broad categories of disclosure requirements in FASB Topic 275 are relevant to government. However, because of the differences between the public and private sectors, each category needs to be carefully considered in the context of the government environment. For example, seldom are governments exactly alike in the services that are provided to their stakeholders. The types of services provided introduce a different financial risk profile for each government. Therefore, information on the nature of operations is relevant to users of financial statements.
Due to the nature of the types of arrangements that have been addressed in recent standards (for example, pensions, other postemployment benefits, asset retirement obligations, and leases), the use of estimates has become even more prevalent in preparation of government financial statements. Regarding potential disclosures associated with the use of estimates, some governments currently provide the type of disclosure currently provided for in the private sector; however, other governments do not, which results in financial reporting inconsistencies.
As demand for government services increase while resources are being constrained, the disclosure of existing concentrations that make the entity vulnerable to the risk of a near-term severe impact on resources is relevant to financial statement users. The events that could cause the severe impact will occur in the near term may be considered essential information for governmental financial statement users. However, outreach with those users is critical to determining what information is essential. In the governmental environment, an entity may have a concentration related to a nonexchange funding source from another government (for example, a school district may obtain a significant portion of its annual revenue from a state). A government could have a concentration related to an exchange funding source (for example, a public power utility may obtain a significant portion of its revenue from the provision of electricity to a single customer or a small group of customers).
Accounting and Financial Reporting Issues. The following issues would be considered:
Work Plan:
Minutes of Meetings, September 19–20, 2023
The Board continued redeliberations by discussing the effective date and transition in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided to carry forward the provision that governments should apply the proposed guidance only to the financial statements of the current period (a prospective transition). Additionally, the Board tentatively decided to modify the proposed effective date in the Exposure Draft to fiscal years beginning after June 15, 2024, and all reporting periods thereafter. Lastly, the Board tentatively decided that the effective date provisions of the proposed guidance should continue to encourage earlier application.
The Board also discussed the totality of its modifications in its redeliberations of the proposals in the Exposure Draft and whether those modifications necessitated a reexposure of the document. After that discussion, the Board directed the project staff to prepare a preballot draft of a final Statement to discuss at its next meeting.
Minutes of Meetings, August 9–10, 2023
The Board continued redeliberations by discussing the nonauthoritative illustrations in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided to remove Illustration 1, Illustration 2, and Illustration 4 in the ED. The Board tentatively decided to add proposed Illustration A and Illustration B to the nonauthoritative illustrations. Lastly, the Board tentatively decided to carry forward Illustration 3 and Illustration 5, as modified, in the ED.
Minutes of Meetings, June 27–29, 2023
The Board continued redeliberations by discussing an additional level of assessment of the disclosure criteria in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided that, in addition to assessing the disclosure criteria for the primary government (including its blended component units), governments also should assess the disclosure criteria for those reporting units that report a liability for revenue debt.
Minutes of Meetings, May 16–17, 2023
The Board continued redeliberations by discussing the level for the assessment of the disclosure criteria presented in paragraph 8 of the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided that the disclosure criteria should be assessed for the primary government. The Board also directed the staff to provide additional information to assist the Board in deciding whether, in addition to making the assessment for the primary government, governments also should assess the disclosure criteria for those individual funds or identifiable activities that have bonds or other debt instruments with a revenue stream pledged in support of that debt.
Next, the Board considered modifications to the language in paragraph 8 of the Exposure Draft regarding the level of detail for the disclosure requirements. The Board tentatively decided to modify paragraph 8 to (1) convey that the information disclosed corresponds to the reporting units presented in the financial statements, (2) eliminate the reference to the disclosure criteria, (3) add language to convey that the same information for more than one reporting unit should be combined to avoid unnecessary duplication, and (4) clarify that the information disclosed is subject to requirements in paragraph 63 of Statement No. 14, The Financial Reporting Entity, for discretely presented component units.
The Board then considered the potential overlap of the disclosure requirements in this project with existing guidance. The Board tentatively decided not to specify the guidance that does or does not overlap (including not referring to concentrations related to financial instruments). The Board also tentatively decided that (1) in certain circumstances, the disclosure requirements may supplement or overlap with other authoritative guidance and (2) governments should combine the information provided with that required by other note disclosure guidance to avoid unnecessary duplication.
Additionally, the Board tentatively decided to describe in the Basis for Conclusions how (1) the concept of “risk” and (2) information provided pursuant to other guidance may inform a government’s judgments about when a risk disclosure should no longer be included in the notes to financial statements.
Minutes of Meetings, April 5, 2023
The Board continued redeliberations of the disclosure criteria by discussing the time frame for the substantial effect caused by an event associated with a concentration or constraint presented in paragraph 6c of the Exposure Draft, Certain Risk Disclosures. In reference to that criterion, the Board tentatively decided to carry forward the description of the starting time frame for the occurrence of an event or events as “either has occurred or is more likely than not to begin to occur.” Next, the Board tentatively decided to eliminate the phrase “within three years of the financial statement date,” which describes the time frame for the substantial impact caused by an event to occur.
Next, the Board discussed the disclosure requirements in paragraph 7 of the Exposure Draft. For the introductory portion of the paragraph, the Board tentatively decided to modify the description of the level of detail for the information to be provided by changing the phrase “and their potential effect on the government’s ability to provide services at the level provided in the current reporting period or to meet its obligations as they come due” to “and the government’s vulnerability to the risk of a substantial impact.”
The Board then tentatively decided to change the disclosure requirement in paragraph 7b to “If it has occurred before the financial statements are available to be issued, a description of each event associated with the concentration or constraint that could cause the substantial impact.” Additionally, the Board tentatively decided to change the disclosure requirement in paragraph 7c to “A description of actions taken by the government prior to the date the financial statements are available to be issued to mitigate the risk.” The Board tentatively decided to carry forward all other aspects of paragraph 7.
Minutes of Meetings, February 21–23, 2023
The Board continued its redeliberations by discussing the criteria for disclosure as presented in paragraph 6 of the Exposure Draft, Certain Risk Disclosures. In reference to the criterion in paragraph 6a, the Board tentatively decided to (1) modify the timeframe for the knowledge of the concentration or constraint to “prior to the date the financial statements are available to be issued” and (2) carry forward all other aspects of the criterion.
Next, for the disclosure criterion in paragraph 6b, the Board tentatively decided to (1) retain “more likely than not” as the likelihood threshold of an event occurring that is associated with the concentration or constraint, (2) modify the timeframe during which a potential event may occur to “within 12 months of the date the financial statements are available to be issued,” (3) add the phrase “or events” to “an event,” and (4) carry forward all other aspects of the disclosure criterion.
Finally, the Board considered the disclosure criterion in paragraph 6c and tentatively decided to (1) remove the likelihood threshold from the criterion, (2) retain the word “substantial” to describe the magnitude of a potential effect, and (3) modify the description of the potential effect of the risk to “the concentration or constraint makes the government vulnerable to the risk of a substantial impact.” The Board requested that the revised disclosure criterion related to paragraph 6c be brought to the Board for discussion at a future meeting.
Minutes of Meetings, January 10–11, 2023
The Board continued its redeliberations by discussing feedback received on the proposals regarding the descriptions and examples of the two categories of risk in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided to (1) remove the word sufficient from the phrase lack of sufficient diversity in the proposed description of a concentration, (2) carry forward the other proposed aspects of the description of the concentrations category without modification, and (3) carry forward the proposed examples of concentrations without modification.
Next, the Board tentatively decided to (1) remove the phrase common in the governmental environment from the proposed title and description of the constraints category, (2) carry forward the other proposed aspects of the description of the constraints category without modification, and (3) carry forward the proposed examples of constraints without modification.
Minutes of Meetings, November 16–18, 2022
The Board began redeliberations by discussing the scope of the project. The Board tentatively decided to carry forward its approach to limit the scope of the project to certain categories of risk disclosures.
Next, the Board discussed the categories of risk disclosures to include in the scope of the project and tentatively decided to carry forward the risk categories of certain concentrations and certain constraints common in the governmental environment.
The Board then considered stakeholder feedback suggesting other risk categories to include in the scope of the project. The Board tentatively decided not to include risk categories related to the nature of a government’s operations, the use of estimates in the preparation of a government’s financial statements, or any other risk categories in the scope of the project.
Next, the Board considered stakeholder feedback to exclude certain types of events, such as acts of God, war, or sudden catastrophes from the scope of the project. The Board tentatively decided that the scope should not exclude those types of events.
Finally, the Board considered reporting requirements for governments that present comparative financial statements. The Board tentatively decided to carry forward the proposal that reporting requirements should apply only to the financial statements of the current period.
Minutes Archive
The Board tentatively decided the following:
Project Description: The objective of this project is to identify potential risks and uncertainties in the state and local government environment and to consider developing disclosure requirements associated with those risks.
Status:
Exposure Draft Comment Period
- Background
- Accounting and Financial Reporting Issues
- Project History
- Current Developments
- Work Plan
- Recent Minutes
- Minutes Archive
- Tentative Board Decisions
- Project staff:
Risks and Uncertainties Disclosures—Project Plan
Background: General disclosure guidance in FASB Accounting Standards Codification® (ASC) Topic 275, Risks and Uncertainties, requires a nongovernmental entity to disclose risks and uncertainties relating to the nature of its operations, its estimates, and vulnerability due to certain concentrations. (Topic 275 primarily is derived from AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, which was issued in 1994.) For some governmental entities, the long-term impacts of the COVID-19 pandemic might be felt across each of those categories. However, the potential need for this information by users of financial statements extends beyond the effects of the pandemic.
The three broad categories of disclosure requirements in FASB Topic 275 are relevant to government. However, because of the differences between the public and private sectors, each category needs to be carefully considered in the context of the government environment. For example, seldom are governments exactly alike in the services that are provided to their stakeholders. The types of services provided introduce a different financial risk profile for each government. Therefore, information on the nature of operations is relevant to users of financial statements.
Due to the nature of the types of arrangements that have been addressed in recent standards (for example, pensions, other postemployment benefits, asset retirement obligations, and leases), the use of estimates has become even more prevalent in preparation of government financial statements. Regarding potential disclosures associated with the use of estimates, some governments currently provide the type of disclosure currently provided for in the private sector; however, other governments do not, which results in financial reporting inconsistencies.
As demand for government services increase while resources are being constrained, the disclosure of existing concentrations that make the entity vulnerable to the risk of a near-term severe impact on resources is relevant to financial statement users. The events that could cause the severe impact will occur in the near term may be considered essential information for governmental financial statement users. However, outreach with those users is critical to determining what information is essential. In the governmental environment, an entity may have a concentration related to a nonexchange funding source from another government (for example, a school district may obtain a significant portion of its annual revenue from a state). A government could have a concentration related to an exchange funding source (for example, a public power utility may obtain a significant portion of its revenue from the provision of electricity to a single customer or a small group of customers).
Accounting and Financial Reporting Issues. The following issues would be considered:
- Categories of risks and uncertainties (for example, operations, estimates, and concentrations)
- Specific disclosure requirements within each category
- Criteria associated with disclosures.
- Added to the current technical agenda: July 2020
- Task force established? No
- Deliberations began: September 2020
- Exposure draft issued: June 2022
- Comment period: July—September 2022
- Redeliberations began: November 2022
Work Plan:
|
Board Meetings |
Topics to Be Considered |
| October/November 2023
|
Review pre-ballot draft of a Final Statement |
| December 2023 | Review ballot draft of a Final Statement and consider for approval |
Risks and Uncertainties Disclosures—Recent Minutes
Minutes of Meetings, September 19–20, 2023
The Board continued redeliberations by discussing the effective date and transition in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided to carry forward the provision that governments should apply the proposed guidance only to the financial statements of the current period (a prospective transition). Additionally, the Board tentatively decided to modify the proposed effective date in the Exposure Draft to fiscal years beginning after June 15, 2024, and all reporting periods thereafter. Lastly, the Board tentatively decided that the effective date provisions of the proposed guidance should continue to encourage earlier application.
The Board also discussed the totality of its modifications in its redeliberations of the proposals in the Exposure Draft and whether those modifications necessitated a reexposure of the document. After that discussion, the Board directed the project staff to prepare a preballot draft of a final Statement to discuss at its next meeting.
Minutes of Meetings, August 9–10, 2023
The Board continued redeliberations by discussing the nonauthoritative illustrations in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided to remove Illustration 1, Illustration 2, and Illustration 4 in the ED. The Board tentatively decided to add proposed Illustration A and Illustration B to the nonauthoritative illustrations. Lastly, the Board tentatively decided to carry forward Illustration 3 and Illustration 5, as modified, in the ED.
Minutes of Meetings, June 27–29, 2023
The Board continued redeliberations by discussing an additional level of assessment of the disclosure criteria in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided that, in addition to assessing the disclosure criteria for the primary government (including its blended component units), governments also should assess the disclosure criteria for those reporting units that report a liability for revenue debt.
Minutes of Meetings, May 16–17, 2023
The Board continued redeliberations by discussing the level for the assessment of the disclosure criteria presented in paragraph 8 of the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided that the disclosure criteria should be assessed for the primary government. The Board also directed the staff to provide additional information to assist the Board in deciding whether, in addition to making the assessment for the primary government, governments also should assess the disclosure criteria for those individual funds or identifiable activities that have bonds or other debt instruments with a revenue stream pledged in support of that debt.
Next, the Board considered modifications to the language in paragraph 8 of the Exposure Draft regarding the level of detail for the disclosure requirements. The Board tentatively decided to modify paragraph 8 to (1) convey that the information disclosed corresponds to the reporting units presented in the financial statements, (2) eliminate the reference to the disclosure criteria, (3) add language to convey that the same information for more than one reporting unit should be combined to avoid unnecessary duplication, and (4) clarify that the information disclosed is subject to requirements in paragraph 63 of Statement No. 14, The Financial Reporting Entity, for discretely presented component units.
The Board then considered the potential overlap of the disclosure requirements in this project with existing guidance. The Board tentatively decided not to specify the guidance that does or does not overlap (including not referring to concentrations related to financial instruments). The Board also tentatively decided that (1) in certain circumstances, the disclosure requirements may supplement or overlap with other authoritative guidance and (2) governments should combine the information provided with that required by other note disclosure guidance to avoid unnecessary duplication.
Additionally, the Board tentatively decided to describe in the Basis for Conclusions how (1) the concept of “risk” and (2) information provided pursuant to other guidance may inform a government’s judgments about when a risk disclosure should no longer be included in the notes to financial statements.
Minutes of Meetings, April 5, 2023
The Board continued redeliberations of the disclosure criteria by discussing the time frame for the substantial effect caused by an event associated with a concentration or constraint presented in paragraph 6c of the Exposure Draft, Certain Risk Disclosures. In reference to that criterion, the Board tentatively decided to carry forward the description of the starting time frame for the occurrence of an event or events as “either has occurred or is more likely than not to begin to occur.” Next, the Board tentatively decided to eliminate the phrase “within three years of the financial statement date,” which describes the time frame for the substantial impact caused by an event to occur.
Next, the Board discussed the disclosure requirements in paragraph 7 of the Exposure Draft. For the introductory portion of the paragraph, the Board tentatively decided to modify the description of the level of detail for the information to be provided by changing the phrase “and their potential effect on the government’s ability to provide services at the level provided in the current reporting period or to meet its obligations as they come due” to “and the government’s vulnerability to the risk of a substantial impact.”
The Board then tentatively decided to change the disclosure requirement in paragraph 7b to “If it has occurred before the financial statements are available to be issued, a description of each event associated with the concentration or constraint that could cause the substantial impact.” Additionally, the Board tentatively decided to change the disclosure requirement in paragraph 7c to “A description of actions taken by the government prior to the date the financial statements are available to be issued to mitigate the risk.” The Board tentatively decided to carry forward all other aspects of paragraph 7.
Minutes of Meetings, February 21–23, 2023
The Board continued its redeliberations by discussing the criteria for disclosure as presented in paragraph 6 of the Exposure Draft, Certain Risk Disclosures. In reference to the criterion in paragraph 6a, the Board tentatively decided to (1) modify the timeframe for the knowledge of the concentration or constraint to “prior to the date the financial statements are available to be issued” and (2) carry forward all other aspects of the criterion.
Next, for the disclosure criterion in paragraph 6b, the Board tentatively decided to (1) retain “more likely than not” as the likelihood threshold of an event occurring that is associated with the concentration or constraint, (2) modify the timeframe during which a potential event may occur to “within 12 months of the date the financial statements are available to be issued,” (3) add the phrase “or events” to “an event,” and (4) carry forward all other aspects of the disclosure criterion.
Finally, the Board considered the disclosure criterion in paragraph 6c and tentatively decided to (1) remove the likelihood threshold from the criterion, (2) retain the word “substantial” to describe the magnitude of a potential effect, and (3) modify the description of the potential effect of the risk to “the concentration or constraint makes the government vulnerable to the risk of a substantial impact.” The Board requested that the revised disclosure criterion related to paragraph 6c be brought to the Board for discussion at a future meeting.
Minutes of Meetings, January 10–11, 2023
The Board continued its redeliberations by discussing feedback received on the proposals regarding the descriptions and examples of the two categories of risk in the Exposure Draft, Certain Risk Disclosures. The Board tentatively decided to (1) remove the word sufficient from the phrase lack of sufficient diversity in the proposed description of a concentration, (2) carry forward the other proposed aspects of the description of the concentrations category without modification, and (3) carry forward the proposed examples of concentrations without modification.
Next, the Board tentatively decided to (1) remove the phrase common in the governmental environment from the proposed title and description of the constraints category, (2) carry forward the other proposed aspects of the description of the constraints category without modification, and (3) carry forward the proposed examples of constraints without modification.
Minutes of Meetings, November 16–18, 2022
The Board began redeliberations by discussing the scope of the project. The Board tentatively decided to carry forward its approach to limit the scope of the project to certain categories of risk disclosures.
Next, the Board discussed the categories of risk disclosures to include in the scope of the project and tentatively decided to carry forward the risk categories of certain concentrations and certain constraints common in the governmental environment.
The Board then considered stakeholder feedback suggesting other risk categories to include in the scope of the project. The Board tentatively decided not to include risk categories related to the nature of a government’s operations, the use of estimates in the preparation of a government’s financial statements, or any other risk categories in the scope of the project.
Next, the Board considered stakeholder feedback to exclude certain types of events, such as acts of God, war, or sudden catastrophes from the scope of the project. The Board tentatively decided that the scope should not exclude those types of events.
Finally, the Board considered reporting requirements for governments that present comparative financial statements. The Board tentatively decided to carry forward the proposal that reporting requirements should apply only to the financial statements of the current period.
Minutes Archive
Risks and Uncertainties Disclosures—Tentative Board Decisions to Date
The Board tentatively decided the following:
- The proposed approach to limit the scope to certain categories of risk should be carried forward.
- The proposed risk categories of certain concentrations and certain constraints common in the governmental environment should be carried forward.
- The potential risk categories of the nature of a government’s operations and the use of estimates in the preparation of a government’s financial statements should not be included in the scope of the project.
- No other risk categories should be included in the scope of the project.
- A scope exclusion for certain events, such as acts of God, war, or sudden catastrophes should not be included in the proposed guidance.
- The proposal that if a government presents comparative financial statements, the reporting requirements should apply only to the financial statements of the current period should be carried forward.
- The word, sufficient, should be removed from the proposed description of a concentration and the other proposed aspects of the description of the concentrations category should be carried forward.
- The proposed guidance should not exclude concentrations related to financial instruments.
- The proposed examples of concentrations should be carried forward.
- The phrase, common in the governmental environment, should be removed from the proposed title and description of a constraint, and the other proposed aspects of the description of the constraints category should be carried forward.
- The proposed examples of constraints should be carried forward.
- The assessment of the disclosure criteria should be made at the level of the primary government.
- An additional assessment of the disclosure criteria should be made for those reporting units which report a liability for revenue debt.
- The timeframe of the knowledge of a concentration or constraint in paragraph 6a should be modified to “prior to the date the financial statements are available to be issued.”
- The other aspects of the disclosure criterion in paragraph 6a should be carried forward.
- The description of the starting time frame for an event that is associated with the concentration or constraint in paragraph 6b of “either has occurred or is more likely than not to begin to occur” should be retained.
- The timeframe during which a potential event may occur in paragraph 6b should be modified to “within 12 months of the date the financial statements are available to be issued.”
- The phrase “or events” should be added to “an event” in paragraph 6b.
- The other aspects of the disclosure criterion in paragraph 6b should be carried forward.
- The likelihood threshold of “at least reasonably possible” should be removed from the disclosure criterion in paragraph 6c.
- The description of the magnitude of a potential effect as “substantial” should be retained in the criterion in paragraph 6c, and the meaning of “substantial” should be clarified in the Basis for Conclusions to be “greater than significant.”
- The proposed effect of the event should be modified from “will cause there to be a substantial effect on the government’s ability to (1) continue to provide services at the level provided in the current reporting period or (2) meet its obligations as they come due” to “the concentration or constraint makes the government vulnerable to the risk of a substantial impact” in paragraph 6c and an elaboration of “substantial impact” will be provided in the Basis for Conclusions.
- In paragraph 6c of the Exposure Draft, the phrase “within three years of the financial statement date” to describe the time frame for the substantial impact caused by the event should be removed.
- The paragraph 7 introduction will be changed from “and their potential effect on the government’s ability to provide services at the level provided in the current reporting period or to meet its obligations as they come due” to “and the government’s vulnerability to the risk of a substantial impact.”
- The disclosure requirement in paragraph 7b will be changed to “If it has occurred before the financial statements are available to be issued, a description of each event associated with the concentration or constraint that could cause the substantial impact.”
- The disclosure requirement in paragraph 7c will be changed to “A description of actions taken by the government prior to the date the financial statements are available to be issued to mitigate the risk.”
- All other aspects of paragraph 7 will be carried forward.
- Paragraph 8 should be modified to (1) convey that the information disclosed corresponds to the reporting units presented in the financial statements, (2) eliminate the reference to the disclosure criteria, (3) add language that the same information for more than one reporting unit should be combined to avoid unnecessary duplication, and (4) clarify that the information disclosed is subject to requirements in paragraph 63 of Statement No. 14, The Financial Reporting Entity, for discretely presented component units.
- The note disclosures required by a final Statement may supplement or overlap other note disclosure requirements. Therefore, in certain circumstances, governments should combine the information with that required by other note disclosure guidance to avoid unnecessary duplication.
- The Basis for Conclusions should specifically describe how (1) the concept of “risk” and (2) information provided pursuant to other guidance may inform a government’s judgments about when a risk disclosure should no longer be included in notes to financial statements.
- The following nonauthoritative illustrations in the Exposure Draft should be removed: Illustration 1, Illustration 2, and Illustration 4.
- The following nonauthoritative illustrations in the Exposure Draft should be carried forward: Illustration 3 and Illustration 5, as modified.
- Proposed Illustrations A and B should be added to the nonauthoritative illustrations.
- The effective date should be modified to fiscal years beginning after June 15, 2024, and all reporting periods thereafter.
- The effective date provisions of the proposed guidance should continue to encourage earlier application.