Statement: Implementation of GASB 48
GASB 48 addresses whether the sale of receivables results in either a sale or a collateralized borrowing. The Statement addresses measurement, recognition, and disclosure requirements for these types of transactions. In addition, this Statement establishes accounting and reporting standards for intra-entity transfers of assets and future revenues.
Sale or Collateralized Borrowing?
Institutions sometimes exchange an interest in their receivables for immediate cash payments – usually, a single lump sum. These transactions should be reported as a collateralized borrowing unless the institution’s continuing involvement with the receivables is effectively terminated. An institution’s continuing involvement is considered effectively terminated when all of the following occur:
- The transferee’s ability to sell or pledge the receivables is not significantly limited by constraints imposed by the institution.
- The institution does not have the option to unilaterally substitute or reacquire specific accounts from among the receivables transferred.
- The sale agreement is not cancellable by either party, including cancellation through payment of a lump sum or transfer of other assets or rights.
- The receivables and the cash resulting from their collection have been isolated from the institution.
Determining that receivables have been isolated from the institutions should be based on the following criteria:
- The transferee should have legal standing separate from the institution.
- Banking agreements should eliminate access by the institution and its component units to the cash generated by collecting the receivables. If the institution continues to service the accounts or if the obligors misdirect their payments on transferred accounts to the institution:
- The payments to the transferee should be made only from the resources generated by the specific receivables rather than from institutional resources. The institution should have no obligation to advance amounts to the transferee before it collects equivalent amounts from the underlying accounts.
- Cash collected by the institution on behalf of the transferee should be remitted to the transferee without significant delay. Any earnings on invested collections should be passed on to the transferee.
- The institution should consider proceeds received from the transferee as satisfaction of individual accounts. The institution should indicate in its records which accounts have been transferred and which collections pertain to those accounts.
- Provisions in the transfer agreement should protect the transferee from the claims of the institution’s creditors.
Future Revenues
A transaction in which an institution receives proceeds in exchange for cash flows from specific future revenues should be reported as a sale if the institution’s continuing involvement with those revenues meets all of the following:
- The institution will not maintain an active involvement in the future generation of those revenues.
- The transferee’s ability to subsequently sell or pledge the future cash flows is not significantly limited by constraints imposed by the institution.
- The cash resulting from the collection of the future revenues has been isolated from the institution.
- The contract, agreement, or other arrangement between the original resource provider and the institution does not prohibit the transfer or assignment of those resources.
- The sale agreement is not cancelable by either party, including cancellation through payment of a lump sum or transfer of other assets or rights.
When considering whether an institution maintains an active involvement in the generation of specific future revenues, an institution should distinguish those activities that generate a specific revenue from those that are tangential, or incidental, or are undertaken to protect the revenue. Examples of an institution’s active involvement in the future generation of revenues include:
- The institution produces or provides the goods or services that are exchanged for the revenues.
- The institution levies or assesses taxes, fees, or charges and can directly influence the revenue base or the rates applied to that base to generate the revenues.
- The institution is required to submit applications for grants or contributions from other governments, organizations, or individuals to obtain the revenues.
- The institution is required to meet grant or contribution performance provisions to qualify for those revenues.
Activities that would not be considered examples of active involvement in the generation of specific revenues include:
- Holding title to revenue-producing assets, such as for leases, rents, or royalty income.
- Owning a contractual right to a stream of future revenues.
- Satisfying the “required characteristics” eligibility criterion in paragraph 20 of GASB Statement 33.
- Agreeing to refrain from specified acts or transactions, such as noncompetition restrictions.
Accounting for Transactions that do not Qualify as Sales
If the criteria required for sales reporting are not met, a transaction should be reported as a collateralized borrowing. The receivables or future revenues should be considered for financial statement purposes as pledged rather than sold. Proceeds received should be reported as a liability in the statement of net assets.
Pledged receivables should continue to be recognized as assets in the statement of net assets. Pledged revenues should continue to be reported as revenue in accordance with recognition and measurement criteria appropriate to the specific type of revenue pledged. Collections of the pledged revenues or receivables that are subsequently paid to the transferee reduce the liability in the pledging institution’s statement of net assets. Those payments should also be reported as expenditures, rather than reductions of revenue, in the statement of revenues, expenses, and changes in net assets.
Accounting for Transactions that meet the Criteria to be Reported as Sales
If the criteria for sale reporting are met, a transaction should be reported as a sale. In a sale of receivables, the transferor institution should no longer recognize as assets the receivables sold, removing the individual accounts at their carrying value. The difference between the proceeds and the carrying value of the receivables sold should be recognized as a gain or loss in the period of the sale.
In a sale of future revenues, the institution should report the proceeds as deferred revenue or revenue. Generally, revenue should be deferred and recognized over the duration of the sale agreement; however, there may be instances in which recognition in the period of sale is appropriate.
Intra-Entity Transfers of Assets and Future Revenues
When accounting for the transfer of capital and financial assets and future revenues within the same financial reporting entity, the transferee should recognize the assets or future revenues received at the carrying value of the transferor. The difference between the amount paid and the carrying value of the receivables transferred should be reported as a gain or loss by the transferor and as a revenue or expense by the transferee in their separately issued statements, but reclassified as transfers in the financial statements of the reporting entity.
Amortization of Deferred Revenues and Charges
Deferred revenues and charges arising from a sale of future revenues should be amortized over the life of the sale agreement using a systematic and rational method.
Note Disclosures
For the purposes of the following disclosures, pledged revenues are those specific revenues that have been formally committed to directly collateralize or secure debt of the pledging institution, or directly or indirectly collateralize or secure debt of a component unit. For each period in which the secured debt remains outstanding, pledging institutions should disclose information about specific revenues pledged, including:
- Identification of the specific revenue pledged and the approximate amount of the pledge.
- Identification of, and general purpose for, the debt secured by the pledged revenue.
- The period during which the revenue will not be available for other purposes (the term of commitment).
- The relationship of the pledged amount to the total for that specific revenue, if estimable.
- A comparison of the pledged revenues recognized during the period to the principal and interest requirements for the debt directly or indirectly collateralized by those revenues. For this disclosure, pledged revenues recognized during the period may be presented net of specified operating expenses, based on the provisions of the pledged agreement; however, the amounts should not be netted in the financial statements.
In the year of the sale, institutions that sell future revenue streams should disclose information about the specific revenues sold, including:
- Identification of the specific revenue sold, including the approximate amount, and the significant assumptions used in determining the approximate amount.
- The period to which the sale applies.
- The relationship of the sold amount to the total for that specific revenue, if estimable.
- A comparison of the proceeds of the sale and the present value of the future revenues sold, including the significant assumptions used in determining the present value.
Effective Date
This Statement is effective beginning FY 2007-08. In the year of implementation, changes made to comply with this statement, except those that would result from applying the deferral provisions relative to sales of future revenues, should be treated as an adjustment of prior periods, and financial statements presented for the periods affected should be restated. The deferral requirements may be applied prospectively. If restatement for prior periods is not practical, the cumulative effect of applying this Statement should be reported as a restatement of beginning net assets.