Project Pages

Risks and Uncertainties Disclosures

Project Description: The primary objectives of this practice-issue project are to identify potential risks and uncertainties in the state and local government environment and to consider developing disclosure requirements associated with those risks and uncertainties.

Status:
Initial Deliberations  

Risks and Uncertainties Disclosures—Project Plan


Background: General disclosure guidance in FASB Accounting Standards Codification® (ASC) Topic 275, Risks and Uncertainties, requires a nongovernmental entity to disclose risks and uncertainties relating to the nature of its operations, its estimates, and vulnerability due to certain concentrations. (Topic 275 primarily is derived from AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, which was issued in 1994.) For some governmental entities, the long-term impacts of the COVID-19 pandemic might be felt across each of those categories. However, the potential need for this information by users of financial statements extends beyond the effects of the pandemic.

The three broad categories of disclosure requirements in FASB Topic 275 are relevant to government. However, because of the differences between the public and private sectors, each category needs to be carefully considered in the context of the government environment. For example, seldom are governments exactly alike in the services that are provided to their stakeholders. The types of services provided introduce a different financial risk profile for each government. Therefore, information on the nature of operations is relevant to users of financial statements.

Due to the nature of the types of arrangements that have been addressed in recent standards (for example, pensions, other postemployment benefits, asset retirement obligations, and leases), the use of estimates has become even more prevalent in preparation of government financial statements. Regarding potential disclosures associated with the use of estimates, some governments currently provide the type of disclosure currently provided for in the private sector; however, other governments do not, which results in financial reporting inconsistencies. Disclosure requirements regarding changes in estimates are being considered in the project on Prior-Period Adjustments, Accounting Changes, and Error Corrections. Therefore, user outreach efforts will be coordinated to avoid unnecessary duplication and to ensure that user needs are being met with essential information.

As demand for government services increase while resources are being constrained, the disclosure of existing concentrations that make the entity vulnerable to the risk of a near-term severe impact on resources is relevant to financial statement users. The events that could cause the severe impact will occur in the near term may be considered essential information for governmental financial statement users. However, outreach with those users is critical to determining what information is essential. In the governmental environment, an entity may have a concentration related to a nonexchange funding source from another government (for example, a school district may obtain a significant portion of its annual revenue from a state). A government could have a concentration related to an exchange funding source (for example, a public power utility may obtain a significant portion of its revenue from the provision of electricity to a single customer or a small group of customers).

Accounting and Financial Reporting Issues. The following issues would be considered:
  • Categories of risks and uncertainties (for example, operations, estimates, and concentrations)
  • Specific disclosure requirements within each category
  • Thresholds associated with risk and uncertainty disclosures.
Project History:
  • Added to the current technical agenda: July 2020
  • Consultative group appointed? No
  • Deliberations began: September 2020
Current Developments. At its August 2021 meeting, the Board discussed general disclosure requirements for actual mitigation efforts. In November, the Board revisited the most appropriate degree of likelihood for an event to occur and the degree of impact.  In December 2021, the Board will discuss additional general disclosure requirements to be included in an Exposure Draft.

Work Plan:
 

Board Meetings

Topics to Be Considered

January 2022 Review draft of illustrations.
March 2022 Review first draft of standards section of an Exposure Draft of a proposed Statement; cost-benefit considerations.
May 9, 2022 Review preballot draft of an Exposure Draft of a proposed Statement.
June 20, 2022 Review ballot draft of an Exposure Draft of a proposed Statement and consider for approval.
July–September 2022 Comment period.
October 2022–
January 2023
Redeliberations.
March 13, 2023 Review preballot draft of a final Statement.
April 24, 2023 Review ballot draft of a final Statement and consider for approval.
 

Risks and Uncertainties Disclosures—Recent Minutes


Minutes of Meetings, December 14–16, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by considering general disclosure requirements for risks related to the categories of current vulnerabilities due to certain concentrations and the government environment. The Board tentatively decided that the following general disclosure requirements should be proposed:
  1. An indication that it is at least reasonably possible that an event associated with the condition will occur within 12 months of the financial statement date or shortly thereafter.
  2. An indication that, within two to three years of the financial statement date, it is at least reasonably possible that the event will have a substantial effect on the government’s ability (a) to continue to provide services at the level of the current reporting period or (b) to meet its obligations as they come due.
The Board tentatively decided that proposals for those disclosure requirements are contingent on a future Board discussion of whether an additional disclosure requirement regarding a description of the potential event should be proposed.
 
Additionally, the Board tentatively agreed not to propose that governments disclose their specific determination of likelihood.

Minutes of Meetings, November 2–4, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by considering its prior tentative decisions regarding the degree of likelihood of reasonably possible that an event will occur and reasonably possible that the impact of the event will be substantial. The Board tentatively decided that the degree of likelihood of the event should be modified to at least reasonably possible as a criterion of risk disclosures to be included in an Exposure Draft. The Board tentatively decided that the degree of impact of an event on the government also should be modified to at least reasonably possible to be a substantial impact as another criterion of risk disclosures to be included in an Exposure Draft.

Minutes of Meetings, September 21–23, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing draft illustrations of disclosures related to current vulnerabilities due to certain concentrations and the government environment. The Board discussed the general disclosure requirements, including its prior tentative decision to propose requiring disclosure of a general description of the risk. The Board tentatively concluded that would not be sufficient guidance and it should consider more specific disclosures. The Board then discussed whether to redeliberate its tentative decisions regarding the degree of likelihood and degree of effect thresholds (reasonably possible and substantial) and tentatively agreed to do so in a future meeting.

Minutes of Meetings, August 10–12, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing additional feedback received during the user interview outreach conducted earlier this year.
 
First, the Board discussed disclosures related to mitigation efforts for a disclosed risk. The Board tentatively decided that disclosures related to mitigation efforts for a disclosed risk are consistent with the proposed concepts for types of information that are appropriate for notes to financial statements in paragraphs 9c and 9d of the Revised Exposure Draft, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements.
 
Next, the Board considered disclosures of planned mitigation efforts and tentatively decided that information resulting from the disclosure of planned mitigation efforts meets the criterion in paragraph 10b for types of information that are not appropriate for notes to financial statements in the Revised Exposure Draft. The Board tentatively decided that information resulting from the disclosure of actual mitigation efforts conducted by a government prior to the issuance of the financial statements does not meet any of the criteria for information that is not appropriate for notes to financial statements in paragraph 10 of the Revised Exposure Draft. The Board also tentatively decided that the information resulting from the disclosure of actual mitigation efforts meets the three characteristics of essentiality proposed in paragraph 11 the Revised Exposure Draft.
 
The Board then tentatively decided to propose that the disclosure of actual mitigation efforts be required in situations in which a government determines that the mitigation efforts have not fully mitigated the related risk. Furthermore, the Board tentatively decided not to propose that a risk a government believes has been fully mitigated be required or encouraged to be disclosed along with the related actual mitigated efforts. The Board clarified that the term fully mitigated refers to reducing the risk to a level at which it no longer meets the criteria for disclosure.
 
Lastly, the Board tentatively decided that information resulting from a disclosure that updates a previously disclosed risk is not consistent with the proposed concepts for types of information that are appropriate for notes to financial statements in the Revised Exposure Draft.

Minutes of Meetings, June 30–July 2, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing whether to propose that the information that would result from events associated with four potential categories of risks and uncertainties be required to be disclosed in notes to financial statements. The Board’s discussions included feedback received from interviews with financial statement users conducted by the project staff.
 
First, the Board tentatively decided that the information that would result from events associated with the potential risks and uncertainties categories is consistent with the types of information that are appropriate for notes to financial statements. The Board also tentatively decided that the information that would result from events associated with the four potential risks and uncertainties categories is not consistent with the types of information that are not appropriate for notes to financial statements.
 
The Board then discussed whether the information that would result from events associated with the potential categories of “current vulnerabilities due to certain concentrations” and “the government environment” possesses the three characteristics of essentiality proposed in the Revised Exposure Draft, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements. The Board tentatively decided that the information that would result from events associated with those two potential categories meets the criteria for notes to financial statements and that the perceived costs of providing the information would be justified by its expected benefits. Therefore, the Board tentatively decided to propose that the information associated with those categories be required to be disclosed in notes to financial statements.
 
Lastly, the Board discussed whether the information that would result from events associated with the potential categories of “significant estimates—uncertainties” and “significant estimates—risks” possess the three characteristics of essentiality proposed in the Exposure Draft. The Board tentatively decided that the information that would result from events associated with those potential categories does not possess the characteristics of essentiality. Therefore, the Board tentatively decided not to propose that the information associated with those potential categories be required to be disclosed in notes to financial statements.

Minutes of Meetings, May 20–21, 2021
 
The Board reviewed the background, objective, scope, and methodology used for the user interviews conducted related to the potential disclosures of the four categories on the topic of risks and uncertainties, in addition to the feedback that resulted from those interviews. The Board asked clarifying questions about the user outreach conducted. No tentative Board decisions were made.

Minutes of Videoconference Meetings, February 1, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing the descriptive components of the two approaches (uncertainty approach and risk approach) to the potential category of significant estimates.
 
For the uncertainty approach, the Board tentatively decided to seek user feedback on the proposal that this category be described as an uncertainty based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements. The Board then discussed the circumstances in which a disclosure for an uncertainty would be made. The Board tentatively decided to seek user feedback on the proposal that a disclosure for an uncertainty would be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is more likely than not that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change in estimate as reflected in the relevant assets, liabilities, inflows, outflows, or other disclosures would be significant.
 
The Board then considered the descriptive components of the risk approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on the proposal that this category be described as a risk to a government based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements. The Board then discussed the circumstances in which a disclosure for a risk would be made. The Board tentatively decided to seek user feedback on the proposal that a disclosure for a risk would be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is reasonably possible that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change will have a substantial impact within 2 to 3 years from the date of the financial statements.
 
The Board considered at what level of a government’s reporting entity an uncertainty or risk related to the potential category of significant estimates should be disclosed. The Board tentatively decided to seek user feedback on the proposal that the disclosure of an uncertainty or risk related to the potential category of significant estimates under both approaches would be at the level of the primary government, unless the effect of the uncertainty or risk is substantially different for a reporting unit(s) and, therefore, should be disclosed at the reporting unit level.
 
The Board also discussed the examples to be developed for the proposed guidance on disclosures for the uncertainty or risk approach related to the potential category of significant estimates. The Board tentatively decided to seek user feedback on the proposal that risks and uncertainties that meet the description of these two approaches be disclosed with clarification provided through the use of specific examples to include (1) cost of municipal landfill closure and postclosure care, (2) uncollectible amount of accounts receivable, (3) loss contingency associated with a lawsuit, (4) contingent liability associated with an obligation of another entity, and (5) asset retirement obligation associated with contamination.
 
The Board then deliberated the criterion of substantial impact for the risk-based categories, including the risk approach, and tentatively decided to seek user feedback on the proposal that for the categories of current vulnerabilities due to concentrations and government environment a substantial impact be described as one that affects the government’s ability to (1) continue to provide services at the level of the current reporting period or (2) meet its obligations as they come due.
 
The Board continued by considering the objective of disclosures for the uncertainty approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on whether the objective of disclosures for the uncertainty approach should be to provide essential information to users of government financial reports about an elevated level of variability in a particular recognized or disclosed estimated amount.
 
Lastly, the Board discussed the objective of disclosures for the risk approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on whether the objective of disclosures for the risk approach should be to provide essential information to users of government financial reports about risks faced by those governments that may impact the government’s ability to continue to provide services or meet its obligations as they come due. 

Minutes of Videoconference Meetings, January 1214, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing general descriptions for the categories of current vulnerabilities due to certain concentrations and the government environment, as well as for the potential category of significant estimates.
 
Next, for the category of current vulnerabilities due to concentrations, the Board tentatively decided to seek user feedback on the proposal that risks that meet the description of this category and the limitation thresholds be disclosed with clarification provided through the use of specific examples of potential concentration risks. These examples will tentatively include (1) principal employers; (2) principal industries; (3) principal resource providers; (4) composition of principal resources; (5) labor (such as collective bargaining arrangements or percent of unionized workforce); and (6) external suppliers of material, labor, or services (for example, incarceration facilities with third-party staffing.) With respect to the category of government environment, the Board tentatively decided to seek user feedback on the proposal that all risks that meet the description of the category and the limitation thresholds be disclosed with clarification provided through the use of specific examples, including (a) restrictions on raising revenue, (b) expense restrictions (such as debt covenants), (c) inflexibility in reducing expenses (such as unfunded mandates), and (d) limits on incurrence of debt that are externally imposed.
 
The Board then discussed the potential category of significant estimates and tentatively decided to seek user feedback on alternative descriptions of that potential category. Those alternatives will be further refined at the February Board videoconference.
 
The Board also discussed disclosure objectives related to the categories of current vulnerabilities due to certain concentrations and the government environment. The Board tentatively agreed to seek user feedback on the objective of the proposed disclosures developed for those categories: to provide essential information to users of government financial reports about risks and uncertainties faced by those governments that may impact the government’s ability to continue to provide services and meet its obligations as they come due. Whether the estimates category will be addressed in the objective will be discussed at a future meeting after feedback is received as part of the additional user outreach effort.

Minutes Archive
 

Risks and Uncertainties Disclosures—Tentative Board Decisions to Date


 The Board tentatively decided the following:
  • The scope of the project should be limited to certain categories of risks and uncertainties disclosures.
  • A disclosure that addresses the general nature of the operations of a government should not be proposed to be required.
  • A disclosure that broadly acknowledges the use of estimates in the preparation of governmental financial statements should not be proposed to be required.
  • Disclosures related to significant estimates should not be proposed to be required.
  • Note disclosures related to the category of a government’s current vulnerabilities due to certain concentrations should be proposed to be required.
  • Note disclosures related to the category of the government environment should be proposed to be required.
  • A disclosure should include (1) an indication that it is at least reasonably possible that an event associated with the condition will occur will occur within 12 months of the financial statement date or shortly thereafter and (2) an indication that, within two to three years of the financial statement date, it is at least reasonably possible that the event will have a substantial effect on the government’s ability (a) to continue to provide services at the level of the current reporting period or (b) to meet its obligations as they come due.
  • A disclosure of actual mitigation efforts, when the government determines that it has not mitigated the risk to the point that the risk no longer meets the disclosure criteria, should be proposed.
  • A disclosure of planned mitigation efforts should not be proposed to be required.
  • A disclosure of a risk that the government determines has been mitigated to the point that it no longer meets the risk disclosure criteria should not be proposed to be required or encouraged, nor should the related mitigation efforts be proposed to be required or encouraged.
  • A disclosure of an update for a previously disclosed risk should not be proposed to be required.
  • A disclosure of a government’s specific determination of likelihood should not be proposed to be required.
  • Note disclosures related to (1) current vulnerabilities due to certain concentrations and (2) the government environment should be developed within the described categories and should be accompanied by examples.
  • The objectives of note disclosures for the categories of current vulnerabilities due to certain concentrations and the government environment are to provide essential information to users of governmental financial reports about risks and uncertainties faced by those governments that may impact the government’s ability to continue to provide services and meet its obligations as they come due.
  • For the categories of current vulnerabilities due to certain concentrations and the government environment, disclosures should be required when the government determines that it is at least reasonably possible that an event associated with the risk or uncertainty will occur within 12 months of the financial statement date or shortly thereafter (3 months) and it is at least reasonably possible that event will have a substantial impact within 3 years of the date of the financial statement.
  • For the categories of current vulnerabilities due to concentrations and the government environment, substantial impact should be described as one that affects the government’s ability (1) to continue to provide services at the level of the current reporting period or (2) to meet its obligations as they come due.
  • Note disclosures for current vulnerabilities due to certain concentrations and the government environment should be presented for the primary government, including its blended component units, unless the risk profile is substantially different for a reporting unit(s) and, therefore, should be disclosed for that reporting unit(s).
  • Examples developed for the guidance on note disclosures for current vulnerabilities due to certain concentrations should include (1) principal employers; (2) principal industries; (3) principal resource providers; (4) composition of principal resources; (5) labor (such as collective bargaining arrangements or percent of unionized workforce); and (6) external suppliers of material, labor, or services (for example, incarceration facilities with third-party staffing).
  • Examples developed for the guidance on note disclosures related to the government environment should include (1) restrictions on raising revenue, (2) expense restrictions (such as debt covenants), (3) inflexibility in reducing expenses (such as unfunded mandates), and (4) limits on incurrence of debt that are externally imposed.