Project Pages

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 Both of those pronouncements have been superseded subsequent to November 1989.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Use Proprietary Fund Accounting, would be required to apply the provisions of FASB Statement No. 140, rather than the superseded Statement 77, which would be used by enterprise funds and BTAs that do not make the election.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:

1. What types of securitizations or transfer transactions are currently taking place? Do those transactions have characteristics of sales or borrowings?

2. What assets (financial or other) or revenues are currently involved in the deals?

3. What is currently being reported and disclosed in the financial statements of governments that engage in those activities?

4. How widespread is the creation of separate “securitization” entities, and how are those entities used and reported?

Project History:

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:

• A broad notion of continuing involvement, including such provisions as recourse, substitution, servicing, and residual interests, provides an appropriate basis upon which transfers of receivables can be evaluated to ascertain whether a particular transfer should be reported as a sale or as a collateralized borrowing. A continuing involvement concept would include, but may not be limited to, consideration of the specific manifestations referred to in the preceding sentence.

• The standard should provide the basis for governments to recognize an asset for residual interests in receivables transferred, based on the specifics of the contractual agreement, after giving consideration to the collectibility of residual amounts.

• Within the narrow scope of delinquent tax lien transfers, there is no compelling reason for recognizing “servicing assets” or for imputing and deferring servicing contract revenues. That preliminary conclusion is based on the notion that the heightened significance of servicing revenue in certain commercial enterprises is generally not present in government—especially within the property tax collection arena. Nevertheless, the environment within which certain business-type activities operate may warrant a second look later in the project.

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:

• No additional recognition or display requirements are needed for “plain vanilla” pledged revenue arrangements, however, potential disclosures will be discussed at a future meeting.

• The remittance of resources from a debt-issuing component unit to the pledging government should be recognized as a receivable/payable transaction rather than an expenditure/expense and revenue.

• A commitment of future revenues by a government does not constitute a long-term receivable/payable between the pledging government and the debt-issuing component unit that should be recognized in their respective statements of net assets.

• Committed revenues should be reported gross by the pledging government and the related payment of those pledged revenues should be reported as an expense/expenditure.

• The notion of “continuing involvement” discussed at the October meeting in connection with the sales and commitments of receivables should be expanded to incorporate additional factors, such as those included in EITF 88-18, Sales of Future Revenues, and possibly others to provide a comprehensive set of criteria for distinguishing between sales and commitments of receivables and future revenues.

• Issues deliberated in the development of TB 2004-1 relative to asset and revenue recognition may need to be reviewed in the context of other types of revenues that governments may sell.

• Consideration should be given to the possibility of requiring economic gain or loss type disclosures for transactions that meet criteria for recognition as a sale of the rights to future revenues.

Current Developments:

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.

Work Plan:

The current detailed plan is as follows:

Sales and Pledges—Recent Developments

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 provisions in the proposed Statement regarding potential sales of future revenues should include a clarification of the meaning of “direct involvement” in the generation of future revenues for which rights have been transferred.

• Deferral of gain recognition resulting from a sale of future revenues should be presumed, unless certain criteria (the details of which are to be determined) are met.

• The proposed Statement should not include a proposed requirement (applicable to governments that continue to service receivables that have been sold) to recognize deferred service fee charges or credits based on the extent to which service fee arrangements represent adequate compensation.

• Disclosures about future revenues that have been sold should be made in the period of the sale for all sales and in each subsequent year (through the term of the agreement) if the gain on the sale is not deferred.

• The provisions of the Statement would be applied retroactively.

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 sale or borrowing decision-making process should begin with the presumption that a transaction is a secured borrowing, unless certain criteria are met. Those criteria, discussed later in the meeting, would indicate that the proceeds received arise from a sale rather than a borrowing.

• The intent of the parties in a purported sales transaction should be considered with other facts and circumstances in determining whether the transaction is indeed a sale, or is instead a secured borrowing.

• A required characteristic of a transaction that purports to be a sale of future revenues should be that the deal is noncancelable.

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 revisitation 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 Date

• Initially, the objective of this project was to address financial reporting for securitizations, including “securitization-like” transactions, and other transfers (other transfers 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 address financial reporting for sales and pledges of receivables and future revenues. Securitizations and securitization-like transactions remain within the scope of the project.

• The Board defined the scope of the project to include transactions in which a government receives, or is entitled to, proceeds in exchange for the rights to future cash flows generated by collecting specific receivables or specific future revenues. The scope also includes certain situations in which a government does not receive proceeds but, nevertheless, pledges or commits future cash flows generated by collecting specific future revenues. Excluded from the scope is a government’s pledge of its “full faith and credit” as security for its own debt or the debt of a component unit.

• Determining whether a transaction is a sale or a collateralized borrowing requires an assessment of a government’s continuing involvement with the receivables or rights transferred. A significant aspect of that assessment is considering the degree to which the selling/pledging government (the transferor) retains or relinquishes (to the transferee) control over the receivables or future revenue rights transferred. Generally, a transaction would be reported as a collateralized borrowing unless specific criteria are met.

• If the specified conditions required for sale reporting are not met, a transaction would be reported as a collateralized borrowing. The receivables or future revenues would be considered for financial statement purposes as pledged rather than sold. Proceeds received by the pledging government would be reported as a liability in its statement of net assets and as an other financing source in its governmental funds, if governmental funds receive the proceeds. Similarly, a transferee government should recognize a receivable for the amounts paid to the pledging government. If the specified conditions required for sale reporting are met, a transaction would be reported as a sale.

• In a sale of receivables, the selling government would no longer recognize as assets the receivables sold, removing the individual accounts at their carrying values. The difference between the proceeds and the carrying value of the receivables sold would be recognized as a gain or loss.

• In a sale of future revenues, because there is no recognized asset, a selling government would report the proceeds as revenue or deferred revenue. Generally, revenue would be deferred and recognized over the duration of the sale agreement; however, there may be instances wherein recognition of revenue in the period of the sale would be appropriate. Revenue from all intra-entity sales of future revenues would be deferred. Similarly, the purchasing government in an intra-entity sale would recognize a deferred charge representing the unexpired cost of obtaining the future revenues.

• Often, as part of the proceeds received, a selling government acquires a subordinate or junior note or a residual certificate representing the rights to collections that exceed a stipulated level. A selling government would recognize note or residual certificate as an asset, representing a residual interest in:
  1. excess receivable collections, giving consideration to the likelihood of realization.

  2. excess future revenues, to the extent that asset recognition criteria appropriate to the specific type of revenue that underlies the note or certificate have been met.

  Similarly, a purchasing government would recognize a liability for its obligation to remit residuals to the selling government, based on existing liability recognition criteria.

• A selling government would recognize estimated liabilities arising from the purchase and sale agreement, for example, recourse obligations or repurchase commitments, based on existing liability recognition criteria.

• Some governments pledge the future cash flows of specific revenues but do not receive resources in exchange for that pledge. For example, as security for the debt issued by a component unit, the government pledges all or a portion of a specific future revenue stream to the debt-issuing component unit without establishing itself as primarily or secondarily obligated for the component unit’s debt. The debt-issuing component unit then pledges those future payments from the pledging government as security for its debt. The commitment of future revenues would not constitute a long-term receivable/payable between the pledging government and the debt-issuing component unit that would be recognized in their respective statements of net assets. The pledging government would continue to recognize revenue from the pledged amounts and would recognize a liability to the debt-issuing component unit and an expenditure/expense simultaneous with the recognition of the revenues that are pledged. The debt-issuing component unit would report payments from the pledging government as revenue.

• Pledging governments would disclose certain information in the notes to financial statements, about specific revenues pledged. Governments that sell the rights to future revenues, as determined by applying the criteria in the standard, would also be required to disclose certain information about the specific revenues sold.

• The provisions of the Statement would be effective for financial statements for periods beginning after December 15, 2006.

Sales and Pledges of Receivables and Future Revenues—Relevant Links