Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Receivables
Sales and Pledges of Receivables, Future Revenues and Collateralized Borrowings

GASB 48 provides guidance on how to account for sales and pledges of receivables and future revenues, as well as intra-entity transfers of assets and future revenues.

GASB 48 makes a basic distinction between sales of receivables and future revenues on the one hand and the pledging of receivables or future revenues to repay a borrowing (a collateralized borrowing) on the other. The answer to the question of if a transaction is a sale or a collateralized borrowing is important. The cash received from a sale may be recorded as revenue in some cases, but the cash from a borrowing is not — instead the borrowing results in a liability on the agency’s financial statements.

For annual financial reporting purposes, all agencies must evaluate:

• The reporting of sold or pledged receivables and future revenues
• The reporting of future revenues
• If discretely presented component units engage in any activity that required additional disclosure under GASB 48

Common examples of these types of transactions include:

• Issuance of revenue bonds
• Selling of student loan receivables (including direct loans and Perkins loans)
• Selling of patient receivables (for applicable medical schools and research institutions)
• Component unit issuance of debt to benefit the primary government

Sale of Receivables/ Future Revenues

A transaction from which an agency receives or is entitled to proceeds in exchange for future cash flows from receivables or from specific future revenues is reported as a sale. The sale must meet the criteria demonstrating the agency is no longer actively involved with the receivables of future revenues that it exchanged (transferred) to the other party.

The most significant factor distinguishing sales from borrowings is the continuing involvement of the agency doing the selling or borrowing. The continuing involvement is effectively terminated and the transaction is considered a sale if all of the following criteria are met:

• Neither the agency nor the buyer can cancel the sale.
• The agency cannot limit in any significant way the buyer’s ability to subsequently sell or pledge the receivables or future revenues.
• The agency no longer has access to the receivables, future revenues or the cash collected from them.

Accounting for Sales

Receivables – The receivables sold are removed from the assets in the selling agency’s financial statements and the proceeds are reported as a sale. If there is a difference between the proceeds received by the selling agency and the amount of the receivables reported on its financial statements (the carrying value), the difference is reported as a gain or loss in the accrual-based financial statements (and as revenue in the modified-accrual-based governmental fund financial statements).

Future Revenues – Generally, GASB 65 (paragraph 12) requires the transferring agency to report the proceeds as deferred inflows of resources in both government-wide and fund financial statements and spread it over the life of the sales agreement. In each year of the agreement, a portion of the proceeds is recognized as revenue.

However, if the revenue sold was not previously recognized because of an uncertainty of realization or an inability to reliably measure the revenue, the transferring agency recognizes revenue at the time of sale.

If a state agency buys future revenue from a governmental body that is not a Texas state agency, it should recognize the acquisition at cost and amortize the balance over the life of the purchase agreement. For the sale of future revenues, the purchasing state agency (as long as it is not a component unit of the selling agency) realizes receivables and revenue when the recognition criteria under GAAP are met — the revenue stream now belongs to the purchasing agency.

Accounting for Collateralized Borrowings

GASB 48 establishes that a transaction is collateralized borrowing when there is continuing involvement with the receivables or the future revenues that the selling/transferring agency has sold/transferred to the other party. For financial statement purposes, these items are considered pledged rather than sold. In this situation, the agency pledging the receivables or future revenues reports the proceeds it receives as a liability — not as revenue. The pledging agency continues to report pledged receivables as assets and pledged revenues as revenues, as appropriate under GAAP. The liability is reduced as cash is collected from the pledged receivables or revenues and transferred to the other party.

If the other party to the transaction — the “lender” — is also a state agency, it reports a receivable in the amount of the proceeds it gave to the pledging state agency. The receivable is reduced as the other party (the “lender”) receives the payments from the pledging state agency.

Intra-Entity Transactions

If the purchasing state agency is a part of the same financial reporting entity as the selling state agency, the sale is an intra-entity transaction and the rules are different.

For example, a state agency might sell receivables to one of its component units (such as a public authority). In this case, the public authority purchasing the receivables recognizes assets equal to the carrying value they had for the state agency that sold them. The difference between the purchase price and the carrying value is accounted for as a revenue, expense or expenditure by the public authority in its separately issued financial statements. However, in the financial statements of the reporting state agency (of which both the agency and the authority are a part), these amounts are reported as transfers or subsidies between the agency and its component unit to avoid double-counting.

For a sale of future revenues between parts of the same reporting state agency, GASB 48, paragraph 15 as amended by GASB 65, paragraph 13, requires the buying state agency to report the amount it paid as deferred outflows of resources spread over the life of the sale agreement — each year a portion of the charge is recognized as an expense or expenditure. The buying state agency does not add an asset to its financial statements as no carrying value was reported by the selling state agency. Assets and revenues are not reported until appropriate under GAAP.

GASB 65, paragraph 13, also requires the selling state agency to report the amount received from the intra-entity sale as a deferred inflows of resources in its government-wide and fund financial statements and recognize the amount as revenue spread over the life of the agreement — each year a portion of the receipt is recognized as a revenue.

Required Disclosures

Generally, GASB 48 requires agencies to present disclosures in the notes to the financial statements on the revenues they pledge to collateralize debt until the debt is fully repaid, including:

• Identification of the pledged revenue source, the amount pledged and the percentage of the total revenue stream that was pledged (if it can be estimated)
• Identification of the debt and its purpose
• The length of the pledge
• A comparison of the pledge revenues recognized during the year with the required debt service payments for the year

Disclose the following information about sales of future revenue streams in the year of sale:

• Identification of the revenue sold and the approximate amount
• The period of the sale
• The percentage of the total revenue stream that was sold
• A comparison of the proceeds of the sale with the present value of future revenues
• Significant assumptions made to approximate the amount of revenue sold and the calculation of its present value