No. 2015-79
11 November 2015
To the Point
GASB — final guidance
GASB requires disclosures for
tax abatement agreements
Not all transactions
that reduce tax
revenues are subject
to the guidance.
What you need to know
•
The GASB issued a statement that requires state and local governments to disclose
the amount of tax revenue not collected as a result of tax abatement agreements as
defined by the guidance.
•
The guidance requires governments to disclose information about their own tax
abatements separately from information about tax abatements entered into by other
governments that reduce the reporting government’s tax revenues.
Overview
The Governmental Accounting Standards Board (GASB) recently issued Statement 77, Tax
Abatement Disclosures, to require governments to disclose information about tax revenue
they don’t collect as a result of tax abatement agreements they enter into and tax abatements
other governments enter into that reduce the reporting government’s tax revenues. The
statement is effective for reporting periods ending on or after 15 December 2016. Earlier
application is encouraged.
State and local governments use property tax abatements and other types of tax abatements
to encourage individuals and businesses to take actions that promote economic development
such as building offices or factories or expanding their existing facilities. The new guidance is
intended to provide financial statement users with information about the nature and
magnitude of the reduction in tax revenues resulting from these tax abatement programs,
which may include income tax abatements to encourage film and television production and
business tax abatement programs to encourage investments.
EY AccountingLink | ey.com/us/accountinglink
The goal is to enable users of the financial statements to better assess (1) whether
current-year revenues were sufficient to pay for current-year services, (2) compliance with
finance-related legal or contractual requirements, (3) where a government’s financial resources
come from and how it uses them and (4) the government’s financial position and economic
condition and how they have changed over time.
The disclosure requirements apply to tax abatements resulting from both agreements a
reporting government enters into and agreements entered into by other governments that
reduce the reporting government’s tax revenues.
Key considerations
The guidance applies only to tax abatements. They are defined in Paragraph 4 of the Statement
as “reductions in tax revenues that result from an agreement between one or more governments
and an individual or entity in which the governments promise to forgo tax revenues and the
individual or entity promises to take “a specific action that contributes to the economic
development or otherwise benefits the governments or citizens of those governments.”
A transaction’s substance is the key factor in determining whether it meets the definition of a
tax abatement. An important feature is the existence of an agreement between the government
and an individual or entity. Such agreements may be in writing or may be implied. They do not
have to be legally enforceable.
Certain tax expenditure programs that reduce taxes, encourage beneficial actions by individuals
or entities and are based on an agreement are excluded from the scope of the guidance
because the government does not commit to abate taxes until after the individual or entity
has already performed the activity for which the government is providing the tax abatement.
Disclosure principles
The statement establishes the following disclosure principles:
•
Disclosures should distinguish between tax abatements resulting from (1) agreements
that are entered into by the reporting government and (2) agreements that are entered
into by other governments that reduce the reporting government’s tax revenues.
•
Information for tax abatements may be provided individually or may be aggregated.
•
Information for tax abatements 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.
•
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 commence in the period in which a tax abatement agreement is entered
into and continue until the tax abatement agreement expires, except for disclosures made
related to commitments other than to reduce taxes as part of a tax abatement
agreement, which are made over the time period of the government’s commitment.
Disclosure requirements
A government that chooses to disclose information about individual tax abatement
agreements should present individually only those that meet or surpass a quantitative
threshold selected by the government. The determination of the threshold is a matter of
professional judgment and could be a percentage of the total amount of taxes abated.
2 | To the Point GASB requires disclosures for tax abatement agreements 11 November 2015
EY AccountingLink | ey.com/us/accountinglink
Governments are required to make the following key disclosures about tax abatement
agreements that they enter into:
•
Brief descriptive information, including:
•
Names, if applicable, and purposes of the tax abatement programs
•
The specific taxes being abated
•
The authority under which tax abatement agreements are entered into
•
The criteria that make a recipient eligible to receive a tax abatement
•
The mechanism by which the taxes are abated, including:
•
How the tax abatement recipient’s taxes are reduced, such as through a
reduction of assessed value
•
How the amount of the tax abatement is determined, such as a specific dollar
amount or a specific percentage of taxes owed
•
Provisions for recapturing abated taxes, if any, including the conditions under which
abated taxes become eligible for recapture
•
The types of commitments made by the recipients of the tax abatements.
•
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 the government made commitments other than to reduce taxes as part of a tax
abatement agreement, a description of the following until the government has fulfilled the
commitment:
•
•
The types of commitments made
•
The most significant individual commitments made
If tax abatement agreements are disclosed individually, a brief description of the quantitative
threshold the government used to determine which agreements to disclose individually
Governments should disclose in the notes to financial statements the following information
related to tax abatement agreements that are entered into by other governments that reduce
the reporting government’s tax revenues:
•
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
•
If tax abatement agreements are disclosed individually, a brief description of the
quantitative threshold the reporting government used to determine which agreements to
disclose individually
Disclosures should be made on a gross basis with amounts received or receivable from other
governments related to foregone revenues disclosed separately.
3 | To the Point GASB requires disclosures for tax abatement agreements 11 November 2015
EY AccountingLink | ey.com/us/accountinglink
What’s not required
The guidance does not require certain disclosures that many respondents to the proposal felt
were important such as the future amounts to be abated under existing agreements or the
duration of a tax abatement, recipient compliance with the terms of the abatement agreement
and information about the benefits of tax abatement programs. The name of the recipient of
the abatement is not required by the guidance.
A government can omit information required by the guidance because it is legally prohibited
from being disclosed. If that’s the case, the government should describe the general nature
of the information that is omitted and the specific law or regulation that prohibits it from
being disclosed.
How we see it
• Governmental entities should assess whether they need to adjust their systems to
collect the information to make these disclosures.
• Governmental entities whose tax revenues are reduced as a result of tax abatement
agreements entered into by other governments will need to obtain the information from
the government that entered into the abatement to make these required disclosures.
EY | Assurance | Tax | Transactions | Advisory
© 2015 Ernst & Young LLP.
All Rights Reserved.
SCORE No.BB3081
ey.com/us/accountinglink
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.
Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.
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.
4 | To the Point GASB requires disclosures for tax abatement agreements 11 November 2015