1. GASB 77: Tax Abatement Disclosure and Required Governmental Considerations NASC Annual Conference Salt Lake City, Utah 17 March 2016 Presenter: Joe Huddleston

2. Page 2 Agenda ► Overview ► Scope and applicability of Statement No. 77 ► General disclosure principles ► Disclosure requirements ► Basis for conclusions 17 March 2016NASC: GASB 77

3. Page 3 Overview 17 March 2016NASC: GASB 77

4. Page 4 Statement No. 77 tax abatement disclosures ► Financial statements assist users in assessing: ► Whether government’s current-year revenues were sufficient to pay for current-year services (inter-period equity) ► Whether government complied with finance-related legal and contractual obligations ► Where government’s resources come from and how it uses them ► A government’s financial position and economic condition and how they have changed over time 17 March 2016NASC: GASB 77

5. Page 5 Statement No. 77 tax abatement disclosures (continued) ► Statement No. 77 requires disclosure of tax abatement information about: ► A reporting government’s own tax abatement agreements, and ► Those that are entered into by other governments that reduce the reporting government’s tax revenues 17 March 2016NASC: GASB 77

6. Page 6 Statement No. 77 tax abatement disclosures (continued) ► Governments entering into tax abatement agreements must disclose the following about the agreements ► Brief descriptive information, such as: ► tax being abated ► authority under which tax abatements are provided ► eligibility criteria ► mechanism by which taxes are abated ► provisions for recapturing abated taxes ► types of commitments made by tax abatement recipients ► Gross dollar amount of taxes abated during the period ► Commitments made by a government, other than to abate taxes, as part of tax abatement agreement 17 March 2016NASC: GASB 77

7. Page 7 How Statement No. 77 changes improve financial reporting ► Users will be better equipped to understand ► How tax abatements affect a government’s future ability to raise resources and meet its financial obligations, and ► The impact those abatements have on a government’s financial position and economic condition 17 March 2016NASC: GASB 77

8. Page 8 Scope and applicability of Statement No. 77 17 March 2016NASC: GASB 77

9. Page 9 Scope and applicability of Statement No. 77 ► Statement No. 77 requirements are effective for financial statements for periods beginning after 15 December 2015 ► Statement No. 77 establishes financial reporting standards for tax abatement agreements entered into by state and local governments ► Disclosures required by Statement No. 77 encompass tax abatements resulting from both, agreements that are entered into a) by the reporting government, and b) by other governments and that reduce the reporting government’s tax revenues 17 March 2016NASC: GASB 77

10. Page 10 How is a tax abatement defined? ► A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which: ► one or more governments promise to forgo tax revenues to which they are otherwise entitled, and ► the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments ► Substance over form ► A transaction’s substance, not its form or title, is a key factor in determining whether the transaction meets the definition of a tax abatement for the purposes of Statement No. 77 17 March 2016NASC: GASB 77

11. Page 11 General disclosure principles 17 March 2016NASC: GASB 77

12. Page 12 General disclosure principles ► Disclosures should distinguish between tax abatements resulting from: a) agreements that are entered into by the reporting government, and b) agreements that are entered into by other governments and that reduce the reporting government’s tax revenues ► Tax abatement disclosure information may be provided individually or in the aggregate ► Tax abatement disclosure information resulting from agreements entered into by the reporting government (whether presented individually or in the aggregate) should be organized by each major tax abatement program, such as an economic development program or a television and film production incentive program 17 March 2016NASC: GASB 77

13. Page 13 General disclosure principles (continued) ► Disclosure information for tax abatements resulting from agreements entered into by other governments (whether presented individually or in the aggregate) should be organized by the government that entered into the tax abatement agreement and the specific tax being abated ► Disclosure should begin in the period in which a tax abatement agreement is entered into and continue until the tax abatement agreement expires, except if the government made commitments other than to reduce taxes as part of a tax abatement agreement— that information should be disclosed until the government has fulfilled the commitment 17 March 2016NASC: GASB 77

14. Page 14 Disclosure requirements 17 March 2016NASC: GASB 77

15. Page 15 Agreements by governments In the notes to financial statements, governments should disclose the following information related to tax abatement agreements that they enter into: ► Brief descriptive information, including: ► Names, if applicable, and purposes of the tax abatement programs ► Specific taxes being abated ► Authority under which tax abatement agreements are entered into ► Criteria that make a recipient eligible to receive a tax abatement ► Mechanism by which the taxes are abated ► Provisions for recapturing abated taxes, if any, including the conditions under which abated taxes become eligible for recapture ► Types of commitments made by the recipients of the tax abatements 17 March 2016NASC: GASB 77

16. Page 16 Agreements by governments (continued) ► The gross dollar amount, on an accrual basis, by which the government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements ► If amounts are received or are receivable from other governments in association with the foregone tax revenue: ► The names of the governments ► The authority under which the amounts were or will be paid ► The dollar amount received or receivable from other governments 17 March 2016NASC: GASB 77

17. Page 17 Agreements by governments (continued) ► If the government made commitments other than to reduce taxes as part of a tax abatement agreement, a description of: ► The types of commitments made ► The most significant individual commitments made ► Information about a commitment other than to reduce taxes should be disclosed until the government has fulfilled the commitment ► If tax abatement agreements are disclosed individually, a brief description of the quantitative threshold the government used to determine which agreements to disclose individually ► If a government omits specific information required by Statement No. 77 because the information is legally prohibited from being disclosed, a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition 17 March 2016NASC: GASB 77

18. Page 18 Agreements by other governments In the notes to financial statements, governments should disclose the following information related to tax abatement agreements that are entered into by other governments and that reduce the reporting government’s tax revenue: ► Brief descriptive information, including the names of the governments entering into the tax abatement agreement and the specific taxes being abated ► The gross dollar amount, on an accrual basis, by which the reporting government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements 17 March 2016NASC: GASB 77

19. Page 19 Agreements by other governments (continued) ► If amounts are received or are receivable from other governments in association with the forgone tax revenue: ► The names of the governments ► The authority under which the amounts were or will be paid ► The dollar amount received or receivable from other governments ► If tax abatement agreements are disclosed individually, a brief description of the quantitative threshold the government used to determine which agreements to disclose individually ► If a government omits specific information required by Statement No. 77 because the information is legally prohibited from being disclosed, a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition 17 March 2016NASC: GASB 77

20. Page 20 Other disclosure requirements ► Governments that are legally prohibited from disclosing specific information required by Statement No. 77 may omit that information, provided they: ► Describe the general nature of the tax abatement information omitted, and ► Describe the specific source of the legal prohibition ► Tax abatement agreements that are entered into by a government’s discretely presented component units and that reduce the government’s tax revenues should be disclosed if the government concludes that the information is essential for fair presentation 17 March 2016NASC: GASB 77

21. Page 21 Basis for conclusions 17 March 2016NASC: GASB 77

22. Page 22 Existence of an agreement ► For Statement No. 77 purposes, the most important feature of tax abatements is the existence of an agreement between the government and an individual or entity ► Tax abatements ► Result from an identifiable agreement between a government and a specific individual or entity ► Have at least two components: ► Promise by the government to reduce the individual’s or entity’s taxes, and ► Promise from the individual or entity to subsequently perform a certain beneficial action 17 March 2016NASC: GASB 77

23. Page 23 Other distinguishing features of tax abatements ► A variety of labels are used to identify tax reduction programs ► Exemptions, deductions, credits, rebates, and abatement ► Focus on substance of transaction over form/label ► Labels are used interchangeably to describe similar transactions ► Very different transactions also may be described using the same label 17 March 2016NASC: GASB 77

24. Page 24 Tax abatement definition ► Governmental Accounting Standards Board (GASB) defined a tax abatement (for financial reporting purposes) as resulting from an agreement between one or more governments and an individual or entity in which: a) Government(s) promise to forgo tax revenues to which they are otherwise entitled, and b) Individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments ► Scope of Statement No. 77 is limited to transactions meeting this definition 17 March 2016NASC: GASB 77

25. Page 25 Tax abatement definition (continued) ► Revisions from Exposure Draft clarify that the tax abatement recipient: ► Can be a business or other type of entity, not only a person ► May not be a current taxpayer at the time the agreement is entered into, such as in a business relocation agreement ► May be a remitter of taxes, rather than the obligor of the tax, such as a retail business in a sales tax diversion agreement. 17 March 2016NASC: GASB 77

26. Page 26 Governments involvement in agreement ► GASB’s view: Users of governmental financial statements need information about limitations on the ability of governments to raise revenues, some of which are the product of tax abatements ► Statement No. 77 requires disclosure of information about tax abatement agreements regardless of whether the reporting government was involved in the agreement ► Statement No. 77 requires that information about a government’s own tax abatement agreements be disclosed separately from information about tax abatements resulting from agreements entered into by other governments 17 March 2016NASC: GASB 77

27. Page 27 Level of disclosure detail ► Statement No. 77 allows governments to present information about individual tax abatement agreements or to aggregate larger numbers of similar agreements ► GASB’s view: Aggregating all tax abatement agreements would significantly reduce the usefulness of the disclosures 17 March 2016NASC: GASB 77

28. Page 28 Periods when disclosure should occur ► GASB’s view: ► As long as a tax abatement agreement remains in effect—and therefore, continues to affect a government’s finances—the disclosure is necessary 17 March 2016NASC: GASB 77

29. Page 29 Tax abatement information ► 4 objectives relevant to tax abatements: ► Determining whether current-year revenues were sufficient to pay for current-year services (inter-period equity) ► Compliance with finance-related legal and contractual obligations ► Providing information about sources and uses of financial resources ► Providing information about the financial position and economic condition of a governmental entity ► GASB’s view: Information about agreements that reduce the amount of tax revenue that a government can raise is relevant to understanding current-year revenues ► Some tax abatement agreements contain commitments for the government to perform activities other than to reduce taxes, such as constructing streets and other infrastructure around a new office complex for which a property tax abatement has been provided 17 March 2016NASC: GASB 77

30. Page 30 Tax abatement information (continued) ► Two ways information about tax abatements is relevant to assessments of financial position and economic condition: 1) Information about resource inflows has been identified in research by the GASB and others as being highly important to analyzing financial position and economic condition 2) Commitments of a government other than to reduce taxes could represent actual or contingent obligations that would be relevant considerations when analyzing the financial position and economic condition of that government ► Accrual basis of accounting provides appropriate presentation of forgone amounts of tax revenue 17 March 2016NASC: GASB 77

31. Page 31 Tax abatement information (continued) ► Governments must disclose gross amount of reduction in their tax revenues, as well as amounts, if any, received or receivable from other governments, in association with lost tax revenue ► GASB’s view: Statement No. 77 should not require disclosure of future amounts to be abated under existing agreements ► Disclosure of a government’s commitments other than to reduce taxes is required because no guidance specifically addresses tax abatement agreement commitments ► Statement No. 77’s exception to general disclosure principle: ► Disclosure of other commitments made by a government in a tax abatement agreement should cease after the commitment terms are met 17 March 2016NASC: GASB 77

32. Page 32 Commitments made by tax abatement recipient ► Users want to know: ► Whether tax abatement is justified by the promised return from the tax abatement recipient, and ► Whether the recipient has fulfilled its promise ► Statement requires disclosure of the types of commitments made by tax abatement recipients ► Natural extension of the disclosure of recipient commitments is disclosure of recipient compliance with those commitments 17 March 2016NASC: GASB 77

33. Page 33 Recapture provisions ► Statement requires disclosure of the provisions, if any, for recapturing abated taxes, including the conditions under which recapture is allowed ► Since recaptures are accounted for and reported in the financial statements, GASB decided not to require their disclosure 17 March 2016NASC: GASB 77

34. Page 34 Confidential information ► Statement No. 77 allows a government to omit specific information that it is legally prohibited from disclosing ► Requires government to describe general nature of tax abatement information omitted and the source of the legal prohibition so that users understand what information is missing and why ► If disclosure is deemed essential to fair presentation, Statement No. 77 requires primary governments to disclose the same information about the discreetly presented component unit’s tax abatement as primary governments would report for their own tax abatements ► Overall objective of financial reporting by state and local governments ► Provide information to assist users (the citizenry, legislative and oversight bodies, and investors and creditors) in assessing the accountability of governments and in making economic, social, and political decisions 17 March 2016NASC: GASB 77

35. Page 35 Questions from the audience Q&AQ&A 17 March 2016NASC: GASB 77

36. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2016 Ernst & Young LLP. All Rights Reserved. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com