GASB 77: Tax Abatement
Disclosure and Required
Governmental
Considerations
NASC Annual Conference
Salt Lake City, Utah
17 March 2016
Presenter: Joe Huddleston
Agenda
►
►
►
►
►
Overview
Scope and applicability of Statement No. 77
General disclosure principles
Disclosure requirements
Basis for conclusions
Page 2
17 March 2016
NASC: GASB 77
Overview
Page 3
17 March 2016
NASC: GASB 77
Statement No. 77 tax abatement disclosures
►
Financial statements assist users in assessing:
►
►
►
►
Page 4
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 2016
NASC: GASB 77
Statement No. 77 tax abatement disclosures
(continued)
►
Statement No. 77 requires disclosure of tax
abatement information about:
►
►
Page 5
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 2016
NASC: GASB 77
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
Page 6
17 March 2016
NASC: GASB 77
How Statement No. 77 changes improve
financial reporting
►
Users will be better equipped to understand
►
►
Page 7
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 2016
NASC: GASB 77
Scope and applicability of Statement No. 77
Page 8
17 March 2016
NASC: GASB 77
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
Page 9
17 March 2016
NASC: GASB 77
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
►
Page 10
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 2016
NASC: GASB 77
General disclosure principles
Page 11
17 March 2016
NASC: GASB 77
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
Page 12
17 March 2016
NASC: GASB 77
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
Page 13
17 March 2016
NASC: GASB 77
Disclosure requirements
Page 14
17 March 2016
NASC: GASB 77
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
Page 15
17 March 2016
NASC: GASB 77
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
Page 16
17 March 2016
NASC: GASB 77
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
Page 17
17 March 2016
NASC: GASB 77
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
Page 18
17 March 2016
NASC: GASB 77
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
Page 19
17 March 2016
NASC: GASB 77
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
Page 20
17 March 2016
NASC: GASB 77
Basis for conclusions
Page 21
17 March 2016
NASC: GASB 77
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:
Page 22
►
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 2016
NASC: GASB 77
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
Page 23
17 March 2016
NASC: GASB 77
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
Page 24
17 March 2016
NASC: GASB 77
Tax abatement definition (continued)
►
Revisions from Exposure Draft clarify that the tax
abatement recipient:
►
►
►
Page 25
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 2016
NASC: GASB 77
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
Page 26
17 March 2016
NASC: GASB 77
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
Page 27
17 March 2016
NASC: GASB 77
Periods when disclosure should occur
►
GASB’s view:
►
Page 28
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 2016
NASC: GASB 77
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
Page 29
17 March 2016
NASC: GASB 77
Tax abatement information (continued)
►
Two ways information about tax abatements is relevant to
assessments of financial position and economic condition:
1)
2)
►
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
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
Page 30
17 March 2016
NASC: GASB 77
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:
►
Page 31
Disclosure of other commitments made by a government in a tax
abatement agreement should cease after the commitment terms are met
17 March 2016
NASC: GASB 77
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
►
Page 32
Natural extension of the disclosure of recipient commitments is
disclosure of recipient compliance with those commitments
17 March 2016
NASC: GASB 77
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
Page 33
17 March 2016
NASC: GASB 77
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
►
Page 34
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 2016
NASC: GASB 77
Questions from the audience
Q&A
Page 35
17 March 2016
NASC: GASB 77
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