Sales and Pledges of Receivables and Future Revenues (Tentative Decisions)

Sales and Pledges Scope of the project—Government receives proceeds from a third party in exchange for the rights to future cash flows from: –Receivables: Delinquent property taxes Uncollected fines Mortgages Student loans –Future Revenues

Sales and Pledges Scope of the project: Also includes situations in which the government does not receive proceeds, but pledges future cash flows –Primary government pledges revenues to debt-issuing component unit

Sales and Pledges Added to the agenda in 2004: TB (tobacco settlement) concerns Budgetary pressures to accelerate cash flows Current lack of disclosures about pledged revenues Need for “government-specific” standards

Sales and Pledges Sale or Borrowing? Borrowing by default, unless you can prove otherwise –Intent of the parties, terms of the agreement –Continuing involvement—control Does the transferor government retain control, or is control relinquished? Criteria for receivables Criteria for future revenues

Sales and Pledges Are receivables sold or pledged? Transferee’s ability to sell or pledge Isolation from seller (& its creditors) –Legally separate –No access to cash –Source and timing of payments –Satisfaction of accounts (De-recognition by govt.) –Bankruptcy protection No obligation to replace or repurchase accounts

Sales and Pledges Are future revenues sold or pledged? Transferee’s ability to sell or pledge Transferor’s continuing direct involvement in the generation of the revenues –Excludes own-source revenues Taxes User charges –Grants, entitlements (could be pledged)

Sales and Pledges If not a sale (collateralized borrowing): Pledging government: –Does not de-recognize receivables –Continues recognition of revenues pledged –Recognizes liability for the proceeds –Payments reduce liability (G/F expenditure) Transferee government recognizes a receivable

Sales and Pledges Meets the conditions for sale treatment: Selling government: –De-recognizes receivables –No asset to de-recognize for future revenues –Difference between proceeds and carrying value is gain (loss) Purchasing government: –Intra-entity—asset at carrying value –Outside of the reporting entity—asset at cost

Sales and Pledges Other assets and liabilities: Residual interests—subordinate note/certificate –Excess receivable collections –Excess future revenues Recourse and other obligations Servicing fees—deferred revenues and charges

Sales and Pledges Pledging government does not receive proceeds: –Government may be prohibited or have limited ability to issue debt –Creates/uses component unit to issue debt –Pledge does not constitute a liability –Liability arises when pledged revenue is recognized

Sales and Pledges Disclosures: Proposed for direct or indirect pledges What revenue? Purpose of the debt For how long? Significance of pledged amount Coverage Proposed for future revenues sold What revenue? For how long? Significance of amount sold

Timetable ED – 3 rd quarter 2005 Statement – 3 rd quarter 2006