1. GASB 77: Tax Abatement Disclosures
Brian D’Amico
Shareholder
November 2, 2016
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

2. GASB 77: Tax Abatement Disclosures
This material was used by Elliott Davis Decosimo during an oral presentation; it is not a complete record of the discussion. This presentation is for informational purposes and does not contain or convey specific advice. It should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor. No part of the presentation may be circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis Decosimo.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

3. Overview
Governmental Accounting Standards Board (GASB) sets rules that accountants, auditors and other finance professional follow when they prepare financial reports.
Prior to GASB 77
GASB never specifically addressed tax breaks for economic development
Costliest job subsidies
Limited to no financial disclosure
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

4. Overview
Tax abatements are widely used by state and local governments to encourage economic development.
Financial statement users need information about certain limitations on a government's ability to raise resources.
Tax abatements, while inducing behavior by individuals and entities that is beneficial to the government or its citizens, limit revenue raising capacity.
Disclosure of information about the nature and magnitude of tax abatements will make these transactions more transparent to financial statement users.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

5. Overview
The Statement is intended to assist these users of financial statements in assessing:
Whether current-year revenues were sufficient to pay for current-year services (inter-period equity),
Whether a government complied with finance-related legal and contractual obligations,
Where a government's financial resources come from and how it uses them, and
A government's financial position and economic condition and how they have changed over time.
Although many governments offer tax abatements and provide information to the public about them, they do not always provide the information necessary to assess how tax abatements affect their financial position and results of operations, including their ability to raise resources in the future.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

6. Overview When is this effective? Who does this affect?
For periods beginning after December 15, 2015
June 30, 2017
Who does this affect?
Governments who have entered into their own tax abatements (active/counties)
Governments who have had tax revenues reduced through agreements entered into by other governments (passive/school districts)
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

7. Definition The Statement defines a tax abatement as
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 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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

8. Definition The tax abatement recipient may 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.
A remitter of taxes, rather than the obligor of the tax, such as a retail business in a sales tax diversion agreement.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

9. Definition
An agreement can be formal (in writing) or informal (implicitly understood)
Doesn’t have to be legally enforceable or include clawbacks
The agreement must be in place before the promise is performed.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

10. Definition
Agreements without promises or a tax reduction may not meet the definition.
Examples of exceptions may include:
Homestead exemptions
Act 388 (school operating millage)
Income tax deductions (i.e. charitable contributions)
Local option sales tax credits
Tax increment finance (TIF) districts
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

11. Definition Potential types of abatements
Exemptions
Deductions
Credits
Rebates
Evaluation must be made based on substance over form or title.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

12. Purpose of Abatements To achieve economic development goals including:
Increasing the property or other tax base;
Addressing cost disadvantages;
Revitalizing distressed local economies;
Retaining or attracting jobs, companies in particular industries or a specific company; or
Increasing the number of persons employed by existing employers.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

13. General Disclosure Principles
Disclosures should distinguish between tax abatements resulting from:
Agreements that are entered into by the reporting governments (active); and
Agreements that are entered into by other governments and that reduce the reporting government’s tax revenues (passive).
Tax abatement disclosure information may be provided individually or in the aggregate.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

14. General Disclosure Principles
Active abatements should be organized by each major tax abatement program, such as an economic development program or a television and film production incentive program.
Passive abatements should be organized by the government that entered into the tax abatement agreement and the specific tax being abated.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

15. General Disclosure Principles
Disclosure should begin in the period in which a tax abatement agreement is entered into and continue until the tax abatement expires, expect 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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

16. Footnote Disclosure Requirements - Active
Brief description 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
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

17. Footnote Disclosure Requirements - Active
Brief description information, including (continued):
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.
The gross dollar amounts, on an accrual basis, by which the government’s tax revenues were reduced during the reporting period as a result of the tax abatement agreements.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

18. Footnote Disclosure Requirements - Active
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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

19. Footnote Disclosure Requirements - Active
If the government made commitments other than to reduce taxes as part of a tax abatement agreements, 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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

20. Footnote Disclosure Requirements - Active
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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

21. Footnote Disclosure Requirements - Passive
Brief description information, including the names of the governments entering into the tax abatement agreement and the specific taxes being abated.
The gross dollar amounts, 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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

22. Footnote Disclosure Requirements - Passive
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
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

23. Footnote Disclosure Requirements - Passive
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.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

24. Level of Disclosure Detail
Individual or aggregate
Sufficient amount of information for understandability
Professional judgment –determination of a quantitative threshold
Percentage of the total amount of taxes abated
Specific dollar amount
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

25. Periods For Disclosure
Disclosure is necessary as long as a tax abatement agreement remains in effect and continues to affect a government’s finances.
Do not have to disclose affect of prior year abatements
Do not have to disclose future estimated abatements
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

26. Component Units (CU)
Primary government (PG) may have a CU that reduces taxes for the PG
Blended CU – disclose the same (active)
Discretely Presented CU – disclose as if entered into by the PG if the information is essential for a fair presentation (active). If not, disclose as if entered into by an other government (passive).
Professional judgement
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

27. Not Required
Number of agreements entered into during the reporting year.
Total number of agreements in force at the end of the reporting year.
Names of tax abatement recipients.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

28. Implementation
Meet with local governments, authorities, commissions and the State
Meeting is to understand
the types of abatement programs that may exist
what they are going to do and provide
Collective organized effort
Materiality considerations
Don’t wait
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

29. Implementation Evaluate agreements
Develop list of abatements that meet the Statement’s definition
Recalculate current bill based on agreement
Calculate abatement
Current bill less what property taxes would have been without the abatement.
Determine most useful presentation (individual or aggregate)
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

30. Questions?
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

31. Brian D’Amico Email: brian.d’amico@elliottdavis.com
Phone:
Website:
Elliott Davis Decosimo ranks among the top 30 CPA firms in the U.S. With twelve offices across four states, the firm provides clients across a wide range of industries with smart, customized solutions. Elliott Davis Decosimo is an independent firm associated with Moore Stephens International Limited, one of the world's largest CPA firm associations with resources in every major market around the globe. For more information, please visit elliottdavis.com.
© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC