Project Pages

Risks and Uncertainties Disclosures

Project Description: The primary objectives of this practice-issue project are to identify potential risks and uncertainties in the state and local government environment and to consider developing disclosure requirements associated with those risks and uncertainties.

Status:
Initial Deliberations  

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. Disclosure requirements regarding changes in estimates are being considered in the project on Prior-Period Adjustments, Accounting Changes, and Error Corrections. Therefore, user outreach efforts will be coordinated to avoid unnecessary duplication and to ensure that user needs are being met with essential information.

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
  • Thresholds associated with risk and uncertainty disclosures.
Project History:
  • Added to the current technical agenda: July 2020
  • Consultative group appointed? No
  • Deliberations began: September 2020
Current Developments. At its January 2022 meeting, the Board discussed disclosure requirements for governments that meet the criteria for disclosure. In March 2022, the Board reviewed a first draft of a standards section of an Exposure Draft and deliberated proposed effective date and transition provisions and cost-benefit considerations.

Work Plan:
 

Board Meetings

Topics to Be Considered

May 9, 2022 Review preballot draft of an Exposure Draft of a proposed Statement.
June 20, 2022 Review ballot draft of an Exposure Draft of a proposed Statement and consider for approval.
July–September 2022 Comment period.
October 2022–January 2023 Redeliberations.
March 13, 2023 Review preballot draft of a final Statement.
April 24, 2023 Review ballot draft of a final Statement and consider for approval.
 

Risks and Uncertainties Disclosures—Recent Minutes


Minutes of Meetings, March 8–10, 2022

The Board reviewed a draft of the Introduction and Standards sections of an Exposure Draft and discussed clarifying edits. Through that discussion, the Board tentatively decided that the proposed reporting requirements only would apply to the financial statements of the most recent fiscal year when comparative financial statements are presented. The Board also tentatively decided to change the likelihood that an event associated with the condition will occur within 12 months of the financial statement date or shortly thereafter (for example, 3 months) from at least reasonably possible to more likely than not.

The Board continued deliberations by discussing transition and effective date requirements and the comment period to be included in the Exposure Draft of a proposed Statement. First, the Board tentatively decided to propose transition provisions that require prospective application. The Board then tentatively decided to propose an effective date of fiscal years beginning after June 15, 2023 and to encourage earlier application. The Board also tentatively agreed that the comment period for the Exposure Draft should be approximately 90 days.

Next, the Board discussed whether the expected benefits to users and other stakeholders resulting from the application of the proposed requirements would justify the perceived costs to preparers and other stakeholders of implementation and ongoing compliance. The Board tentatively decided that the expected benefits would justify the perceived costs.

Next, the Board discussed the characteristics of the accounting and financial reporting information that would result from the provisions of an Exposure Draft. The Board tentatively agreed that the information would meet all the characteristics of Group 1 information and, therefore, is within the scope of the GASB’s authority.

Lastly, the Board directed the project staff to prepare a preballot draft of an Exposure Draft for discussion at the May 9, 2022 Board meeting.

Minutes of Meetings, January 25–27, 2022

The Board continued deliberations on the Risks and Uncertainties Disclosures project by considering general disclosure requirements for risks related to the categories of current vulnerabilities due to certain concentrations and the government environment. The Board tentatively decided that a disclosure should include (1) a brief description of the condition and (2) a brief description of the event. Additionally, the Board tentatively decided the disclosure requirements should include an overall requirement that the disclosure be adequate to satisfy the disclosure objective.

Next, the Board considered whether the disclosure requirements proposed in this project should be applied to situations in which the event associated with a risk or uncertainty occurs prior to the issuance of financial statements but the impact has yet to occur (although expected to occur within two to three years). The Board tentatively decided that, presuming all other criteria are met, disclosures should be required for (1) events that occur after the financial statement date but prior to the issuance date and (2) events that occur prior to the financial statement date.

Lastly, the Board considered whether to add any other disclosure requirements. After considering potential disclosure requirements to increase the specificity with regard to timing and impact, the Board tentatively decided not to propose any other additional disclosure requirements.

Minutes of Meetings, December 14–16, 2021

The Board continued deliberations on the Risks and Uncertainties Disclosures project by considering general disclosure requirements for risks related to the categories of current vulnerabilities due to certain concentrations and the government environment. The Board tentatively decided that the following general disclosure requirements should be proposed:
  1. An indication that it is at least reasonably possible that an event associated with the condition will occur within 12 months of the financial statement date or shortly thereafter.
  2. An indication that, within two to three years of the financial statement date, it is at least reasonably possible that the event will have a substantial effect on the government’s ability (a) to continue to provide services at the level of the current reporting period or (b) to meet its obligations as they come due.
The Board tentatively decided that proposals for those disclosure requirements are contingent on a future Board discussion of whether an additional disclosure requirement regarding a description of the potential event should be proposed.

Additionally, the Board tentatively agreed not to propose that governments disclose their specific determination of likelihood.

Minutes of Meetings, November 2–4, 2021

The Board continued deliberations on the Risks and Uncertainties Disclosures project by considering its prior tentative decisions regarding the degree of likelihood of reasonably possible that an event will occur and reasonably possible that the impact of the event will be substantial. The Board tentatively decided that the degree of likelihood of the event should be modified to at least reasonably possible as a criterion of risk disclosures to be included in an Exposure Draft. The Board tentatively decided that the degree of impact of an event on the government also should be modified to at least reasonably possible to be a substantial impact as another criterion of risk disclosures to be included in an Exposure Draft.

Minutes of Meetings, September 21–23, 2021

The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing draft illustrations of disclosures related to current vulnerabilities due to certain concentrations and the government environment. The Board discussed the general disclosure requirements, including its prior tentative decision to propose requiring disclosure of a general description of the risk. The Board tentatively concluded that would not be sufficient guidance and it should consider more specific disclosures. The Board then discussed whether to redeliberate its tentative decisions regarding the degree of likelihood and degree of effect thresholds (reasonably possible and substantial) and tentatively agreed to do so in a future meeting.

Minutes of Meetings, August 10–12, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing additional feedback received during the user interview outreach conducted earlier this year.
 
First, the Board discussed disclosures related to mitigation efforts for a disclosed risk. The Board tentatively decided that disclosures related to mitigation efforts for a disclosed risk are consistent with the proposed concepts for types of information that are appropriate for notes to financial statements in paragraphs 9c and 9d of the Revised Exposure Draft, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements.
 
Next, the Board considered disclosures of planned mitigation efforts and tentatively decided that information resulting from the disclosure of planned mitigation efforts meets the criterion in paragraph 10b for types of information that are not appropriate for notes to financial statements in the Revised Exposure Draft. The Board tentatively decided that information resulting from the disclosure of actual mitigation efforts conducted by a government prior to the issuance of the financial statements does not meet any of the criteria for information that is not appropriate for notes to financial statements in paragraph 10 of the Revised Exposure Draft. The Board also tentatively decided that the information resulting from the disclosure of actual mitigation efforts meets the three characteristics of essentiality proposed in paragraph 11 the Revised Exposure Draft.
 
The Board then tentatively decided to propose that the disclosure of actual mitigation efforts be required in situations in which a government determines that the mitigation efforts have not fully mitigated the related risk. Furthermore, the Board tentatively decided not to propose that a risk a government believes has been fully mitigated be required or encouraged to be disclosed along with the related actual mitigated efforts. The Board clarified that the term fully mitigated refers to reducing the risk to a level at which it no longer meets the criteria for disclosure.
 
Lastly, the Board tentatively decided that information resulting from a disclosure that updates a previously disclosed risk is not consistent with the proposed concepts for types of information that are appropriate for notes to financial statements in the Revised Exposure Draft.

Minutes of Meetings, June 30–July 2, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing whether to propose that the information that would result from events associated with four potential categories of risks and uncertainties be required to be disclosed in notes to financial statements. The Board’s discussions included feedback received from interviews with financial statement users conducted by the project staff.
 
First, the Board tentatively decided that the information that would result from events associated with the potential risks and uncertainties categories is consistent with the types of information that are appropriate for notes to financial statements. The Board also tentatively decided that the information that would result from events associated with the four potential risks and uncertainties categories is not consistent with the types of information that are not appropriate for notes to financial statements.
 
The Board then discussed whether the information that would result from events associated with the potential categories of “current vulnerabilities due to certain concentrations” and “the government environment” possesses the three characteristics of essentiality proposed in the Revised Exposure Draft, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements. The Board tentatively decided that the information that would result from events associated with those two potential categories meets the criteria for notes to financial statements and that the perceived costs of providing the information would be justified by its expected benefits. Therefore, the Board tentatively decided to propose that the information associated with those categories be required to be disclosed in notes to financial statements.
 
Lastly, the Board discussed whether the information that would result from events associated with the potential categories of “significant estimates—uncertainties” and “significant estimates—risks” possess the three characteristics of essentiality proposed in the Exposure Draft. The Board tentatively decided that the information that would result from events associated with those potential categories does not possess the characteristics of essentiality. Therefore, the Board tentatively decided not to propose that the information associated with those potential categories be required to be disclosed in notes to financial statements.

Minutes of Meetings, May 20–21, 2021
 
The Board reviewed the background, objective, scope, and methodology used for the user interviews conducted related to the potential disclosures of the four categories on the topic of risks and uncertainties, in addition to the feedback that resulted from those interviews. The Board asked clarifying questions about the user outreach conducted. No tentative Board decisions were made.

Minutes Archive
 

Risks and Uncertainties Disclosures—Tentative Board Decisions to Date


 The Board tentatively decided the following:
  • The scope of the project should be limited to certain categories of risks and uncertainties disclosures.
  • A disclosure that addresses the general nature of the operations of a government should not be proposed to be required.
  • A disclosure that broadly acknowledges the use of estimates in the preparation of governmental financial statements should not be proposed to be required.
  • Disclosures related to significant estimates should not be proposed to be required.
  • Note disclosures related to the category of a government’s current vulnerabilities due to certain concentrations should be proposed to be required.
  • Note disclosures related to the category of a government’s current vulnerabilities due to certain constraints in the government environment should be proposed to be required.
  • All disclosures should be adequate to inform users of the general risk associated with the concentration or constraint.
  • A disclosure should include (1) a description of the concentration and constraint and (2) a description of the event.
  • A disclosure should include (1) an indication that an event associated with the concentration or constraint either has occurred or is more likely than not to occur within 12 months of the financial statement date or shortly thereafter and (2) an indication that, within three years of the financial statement date, it is at least reasonably possible that the event will have a substantial effect on the government’s ability (a) to continue to provide services at the level of the current reporting period or (b) to meet its obligations as they come due.
  • A disclosure of actual mitigation efforts taken should be proposed.
  • A disclosure of planned mitigation efforts should not be proposed to be required.
  • A disclosure of a risk that the government determines has been mitigated as the result of actual mitigation efforts taken to the point that it no longer meets the risk disclosure criteria should not be proposed to be required or encouraged, nor should the related mitigation efforts be proposed to be required or encouraged.
  • A disclosure of an update for a previously disclosed risk should not be proposed to be required.
  • A disclosure of a government’s specific determination of likelihood should not be proposed to be required.
  • Note disclosures related to current vulnerabilities due to (1) certain concentrations and (2) certain constraints in the government environment should be developed within the described categories and should be accompanied by examples.
  • The objectives of note disclosures for the categories of current vulnerabilities due to certain concentrations and certain constraints in the government environment are to provide essential information to users of governmental financial reports about risks and uncertainties faced by those governments that may affect the government’s ability to continue to provide services and meet its obligations as they come due.
  • For the categories of current vulnerabilities due to certain concentrations and certain constraints in the government environment, disclosures should be required when the government determines that an event associated with the concentration or constraint has occurred or is more likely than not to occur within 12 months of the financial statement date or shortly thereafter (for example, 3 months) and it is at least reasonably possible that event will have a substantial impact within 3 years of the date of the financial statement.
  • For the categories of current vulnerabilities due to certain concentrations and certain constraints common in the government environment, substantial effect should be described as one that affects the government’s ability (1) to continue to provide services at the level of the current reporting period or (2) to meet its obligations as they come due.
  • Note disclosures for current vulnerabilities due to certain concentrations and certain constraints common in 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 for that reporting unit(s).
  • Examples developed for the guidance on note disclosures for current vulnerabilities due to certain concentrations should include (1) principal employers; (2) principal industries; (3) principal resource providers; (4) composition of principal inflows of resources; (5) workforce covered by collective bargaining agreements; and (6) external suppliers of material, labor, or services.
  • Examples developed for the guidance on note disclosures related to the certain constraints in the government environment should include the following if imposed externally or by a government using its highest level of decision-making authority: (1) limitations on raising revenue, (2) limitations on spending, (3) mandated spending, and (4) limitations on incurrence of debt.
  • The proposed reporting requirements should apply only to the financial statements of the most recent fiscal year when comparative financial statements are presented.
  • The proposed effective date should be for fiscal years beginning after June 15, 2023, with earlier application encouraged.
  • Prospective application should be proposed.
  • The comment period for an Exposure Draft should be approximately 90 days.
  • The expected benefits resulting from the application of the requirements to be proposed in an Exposure Draft would justify the perceived costs of implementation and ongoing compliance.
  • The accounting and financial reporting information that would result from the proposed provisions of an Exposure Draft meet all the characteristics of Group 1 information and, therefore, is within the scope of the GASB's authority.
 
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