GASB Exposure Draft on Tax Abatement Disclosures

On October 20, 2014, the Governmental Accounting Standards Board released an exposure draft regarding disclosures required for tax abatements provided by governmental entities.

The disclosure draft is open for comments until January 30 2015. If approved, the requirements would be effective for financial statements for fiscal years beginning after December 15, 2015. Earlier application would be encouraged.

A summary from the exposure draft is as follows:

Financial statements prepared by state and local governments according to generally accepted accounting principles provide citizens and taxpayers, legislative and oversight bodies, municipal bond analysts, and others with information they need to evaluate the financial health of governments, make decisions, and assess accountability. This information is intended, among other things, to assist these users of financial statements in assessing (1) whether a government’s current-year revenues were sufficient to pay for current-year services (known as interperiod equity), (2) whether a government complied with finance-related legal and contractual obligations, (3) where a government’s financial resources come from and how it uses them, and (4) a government’s financial position and economic condition and how they have changed over time.

Financial statement users need information about certain limitations on a government’s ability to raise resources. This includes limitations on revenue-raising capacity resulting from government programs that use tax abatements to induce behavior by individuals and entities that is beneficial to the government or its citizens. Tax abatements are widely used by state and local governments, particularly to encourage economic development. For financial reporting purposes, this proposed Statement defines a tax abatement as resulting from an agreement between a government and a taxpayer in which the government promises to forgo tax revenues and the taxpayer promises to subsequently take a specific action that contributes to economic development or otherwise benefits the government or its citizens.

Although many governments offer tax abatements, little information is publicly available regarding the provisions of tax abatement agreements or the magnitude of the effect those agreements will have on a government’s ability to raise resources in the future. This proposed Statement would require governments that are subject to tax abatement agreements to disclose the following:

• General descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients
• The number of tax abatement agreements entered into during the reporting period and the total number in effect as of the end of the period
• The dollar amount of taxes abated during the period
• Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement.

This proposed Statement would require disclosures of tax abatement information to distinguish between a reporting government’s own tax abatement agreements and those entered into by other governments that reduce the reporting government’s tax revenues. For its own tax abatements, the reporting government would be able to disclose tax abatement information for individual tax abatement agreements or aggregate the information by major tax abatement program. Tax abatement agreements of other governments that affect the reporting government could be combined.

For more information about this exposure draft, please read the draft in its entirety on the GASB website. It is www.gasb.org, and the exposure draft can be found by clicking the “Proposals” link under QuickLinks on the Home page.