Selling or pledging future cash flows: guidance from the Governmental Accounting Standards Board on selling or pledging future cash flows must be implemented starting with fiscal years that end December 31, 2007.

• Author: Gauthier, Stephen
• Position: The Accounting Angle

In September 2006, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues. The new standard offers authoritative guidance on:

* Accounting for cash received in exchange for rights to the collection of specific receivables

* Accounting for cash received in exchange for rights to specific future revenue streams

* Accounting for the transfer of assets within the financial reporting entity

* Note disclosure requirements applicable to all pledges of specific future revenues.

The new pronouncement must be implemented starting with fiscal years that end December 31, 2007. Earlier implementation is encouraged.

CASH FOR RECEIVABLES

Governments sometimes elect to anticipate future receivables collections by transferring their rights to a third party in exchange for an upfront payment. As a matter of principle, of course, accounting standards attempt to focus on economic substance rather than legal form. Therefore, the proper accounting for the situation just described depends on whether the future receivables collections are truly being sold or merely pledged (i.e., the up-front cash payment is really a collateralized loan). On this all-important issue, GASB Statement No. 48 takes the position that financial statement preparers should presume that receivables collections are being pledged rather than sold. This presumption could be overcome only by meeting specified criteria designed to demonstrate that control of the receivables had effectively been transferred to the counterparty.

CASH FOR FUTURE REVENUES

Governments also sometimes elect to anticipate future revenue collections by transferring their rights to a third party in exchange for an upfront payment. The essential accounting issue, yet again, is whether such a transaction, in substance, constitutes a sale or a collateralized loan. Not surprisingly, GASB Statement No. 48 once more directs that such transactions be presumed to be pledges rather than sales, with specific criteria provided, based on the effective transfer of control, for determining when classification as a sale would be appropriate.

In the private sector, the sale of specific future revenues (e.g., book royalties) would result in the immediate recognition of revenue that otherwise would not have been recognized until subsequent periods. The GASB believes, however, that anticipating revenue...