Proposed guidance on sales and pledges: the key challenge in accounting for the receipt of cash proceeds in exchange for a transfer of the claim to collections of certain receivables or future revenues is to distinguish a true sale from what is really nothing more than a collateralized loan or pledge.

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

This past fall, the Governmental Accounting Standards Board issued an exposure draft on the proper accounting and financial reporting for Sales and Pledges of Receivables and Future Revenues. This article will briefly examine the key provisions of the proposed new guidance.

SCOPE

The GASB's new ED is designed to address two basic situations. In the first instance, a government receives cash proceeds from a counterparty in exchange for transferring to that counterparty the government's claim to collections of certain receivables or future revenues (e.g., the factoring of receivables). The second situation is similar to that just described, except that it is a component unit rather than the primary government itself that receives the proceeds (e.g., an authority established to issue bonds secured by future revenues) In addition, the ED proposes new disclosure requirements that would apply to all types of pledged revenues.

SALE OR LOAN?

The key challenge in accounting for both of the situations just described is to distinguish a true sale from what is really nothing more than a collateralized loan or pledge. Rather than offering criteria for each, the ED proposes to take a conservative approach and require financial statement preparers to presume that any such arrangement constitutes a pledge unless specific criteria are met that would justify classification as a sale. In fact, this presumption is so strong that there would not even be a need to apply the criteria for a sale if both parties to the transactions understood it to be a pledge. The ED further proposes to abandon the traditional "transfer of risks and rewards" approach to defining a sale in favor of criteria that would focus instead on a government's continuing involvement with and control over collections.

In the case of receivables collections that are being transferred to a counterparty, the ED proposes that the transferring government treat the transaction as a sale only if all of the following criteria are met:

* The counterparty can pledge or sell the receivable

* The government cannot unilaterally substitute other receivables for those transferred

* The agreement cannot be cancelled

* The receivables and related collections are isolated from the government's other receivables and collections

The ED goes on to propose specific criteria for determining if this fourth criterion has been met. In the case of the transfer of future revenues to a counterparty, a transaction would...