February 18, 2019

PwC has responded to the GASB’s Preliminary Views on its financial reporting improvements project. Although the focus of the project is primarily on governmental funds, we commented on the portion of the project pertinent to the presentation of proprietary fund financial statements. Entities using the proprietary fund financial reporting model would separate non-operating activities into noncapital subsidies and financing and investing activities. Entities would also present a new required subtotal titled “Operating income (loss) and noncapital subsidies.” PwC expressed concerns on the extension of the “self-sustaining or subsidized” approach to governmental business enterprises and the GASB’s proposed definition of the term “subsidies.”

February 18, 2019

Mr. David R. Bean

Director of Research and Technical Activities

Governmental Accounting Standards Board

401 Merritt 7, PO Box 5116

Norwalk, CT 06856-5116

Dear Mr. Bean:

PricewaterhouseCoopers LLP appreciates the opportunity to comment on the GASB’s Preliminary Views, Financial Reporting Model Improvements (the “PV”). Our comments focus on Chapter 4 and specifically, on its implications for the financial statements of standalone governmental business enterprises (that is, governmental businesses that operate as separate legal entities and are separately governed). Our primary points are summarized below, and we provide further detail on these and additional observations in the Appendix.

Chapter 4 of the PV discusses reporting changes in the context of a proprietary (i.e., fee-based) activity conducted within a department or fund of a larger general-purpose government. Based on Illustration 5 in Appendix D, it appears that the board intends for these changes to also apply in standalone financial statements of governmental business enterprises, consistent with the current requirement that reporting by those entities be based on the model used to report departmental activities within a larger government (GAS 34 par. 138).

As the board considers potential improvements to the existing model, we request that it carefully consider whether GAS 34 par. 138 results in the most appropriate reporting by standalone governmental business enterprises, keeping in mind the primary users of their financial statements (for example, investors in revenue bonds issued by those entities).

Chapter 4’s changes are aimed at driving further consistency in reporting by establishing additional requirements for classifying and displaying transactions that meet the definition of “nonoperating activity.” At present, governmental proprietary activities report nonoperating activities in a separate category that immediately follows the prescribed operating income (loss) measure. Paragraphs 7 to 9 of Chapter 4 propose subdividing nonoperating activities into two categories: “noncapital subsidies” and “financing and investing activities.” They also propose presentation of an additional intermediate measure, “operating income (loss) and noncapital subsidies.” The determination of transactions to be reported in the “noncapital subsidies” section would be based on meeting a new definition of “subsidy.”

If the board decides to move forward with the proposal, we suggest that the two new categories be referred to as “noncapital nonexchange transactions” and “financing and investing activities,” which we believe would be more straightforward and likely better understood than attempting to craft a definition of “subsidy” in order to create a dividing line based on that concept.

Prior to moving forward with the proposal, we also suggest obtaining input from users of governmental business enterprise financial statements as to whether the additional prescriptive requirements would provide information that is significantly more useful and therefore, would justify the additional costs of providing and auditing that information.

We could not discern the board’s intent regarding reporting by entities whose primary operations involve transactions that are “nonoperating,” such as governmental foundations that raise or invest funds for healthcare and higher education institutions.

Today, such an entity is permitted to report its investment income or contributions as operating revenue (see, for example, Q&A 7.73.5 in the Comprehensive Implementation Guide). The proposal would explicitly require noncapital contributions and investment income to be classified as nonoperating in the statement of revenues, expenses, and changes in net position (SRECNP). It is unclear if the proposal intended to preclude such entities from reporting those revenues as operating (and therefore, they would report zero top-line revenue in the operating revenues section of the SRECNP). We encourage the board to clarify its intentions.

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If you have any questions regarding our comments, please contact David Schmid at (973) 997-0768 or Martha Garner at (973) 236-7294.

Sincerely,

We suggest that the board reconsider the appropriateness of GAS 34 par. 138 and in doing so, take a fresh look at reporting by standalone governmental businesses, considering those entities separate from the reporting by proprietary activities or departments of a general government.

We understand that the “self-sustaining or subsidized approach” used today (and affirmed in Chapter 4) might provide useful information to a user of financial statements of a general-purpose taxsupported government entity (for example, to determine how much of taxes raised goes towards subsidizing fee-based activities conducted by the government). The board appears to underscore the importance of consistent rigorous presentation requirements in these situations, which may be necessary in order to facilitate comparisons with other general-purpose government entities of a similar nature. However, we do not believe this is necessarily the most informative approach to reporting by a governmental business enterprise.

Governmental business enterprises operate within a variety of industries, including higher education, healthcare, utilities, transportation, and gaming. Substantive differences exist in, for example, the operations of a hospital and a tribal casino, and as such, we believe that it is important for these entities to have some latitude in how they present the activities comprising their operations. Further, financial statements of governmental business enterprises are rarely (if ever) compared to the financial statements of standalone governments, but are frequently compared to the financial statements of their private sector counterparts (particularly in the healthcare, higher education, and utility sectors). Many of those entities compete against their private sector counterparts for capital in the municipal bond market, where rating and investing decisions are influenced by information reported in financial statements.

As part of this reconsideration, we suggest that the board reach out to users of financial statements of standalone governmental business entities (for example, institutional investors, money market funds, analysts that rate healthcare, higher education, or utility municipal bonds) for feedback on aspects of the reporting model that they view as helpful as well as aspects that do not provide significant value to them. In addition, the board might consider outreach to governmental business entity financial statement preparers to determine whether any limitations imposed by the existing reporting model are viewed as a significant impediment to meaningful reporting. For example, several years ago, the staff conducted financial reporting model roundtables for governmental business-type activities (a mix of representatives of stand-alone governmental businesses along with those representing fee-based activities conducted within funds or departments of larger governments), which generated significant discussion about what aspects of the model worked, and which did not. Among other matters, there was discussion of around the perceived rigidity of the operating/nonoperating classification requirements and how, in certain cases, they impeded organizations from presenting their financial information in ways that they believed were meaningful. In some cases, the views of those representing departmental reporting differed from the views of the standalone enterprises. If areas of concern are identified, the board may wish to weigh the costs and benefits of providing exceptions in standalone reporting situations, taking into consideration any adjustments that would be necessary for inclusion of those statements in the component unit column of another government, if necessary.

In addition, the board may be able to leverage feedback obtained from prior FASB projects. For example, the FASB recently received feedback when it sought to standardize the presentation of income statements/statement of activities of all not-for-profit entities (NFPs). This could likely be a bellwether of views on those matters for governmental business enterprises. Based on the wide range of entities conducting NFP operations, the FASB received feedback indicating that those entities thought it is important for them to have the flexibility to “tell their story” in a meaningful way considering the nature of an entity’s operations. Also common among respondents to the FASB was the view that comparability of reporting among entities operating within a particular industry is more important than comparability of reporting among the spectrum of NFPs.

The proposal appears to implicitly strengthen the linkage between the nonoperating revenue/expense category in the statement of revenues, expenses, and changes in net position (SRECNP) and the transactions reported in the noncapital financing section of the cash flow statement (which reports inflows and outflows associated with noncapital nonexchange transactions and with noncapital borrowings). Based on reviewing Illustration 5 in Appendix D, we believe that the board’s intent is to segregate the nonexchange transactions from the noncapital borrowing activity on the face of the SRECNP, and to caption the nonexchange transactions section as “nonexchange subsidies.” The transactions classified as “nonexchange subsidies” would be reported within the proposed new intermediate measure, “operating income (loss) and noncapital subsidies.” However, Chapter 4 indicates that the transactions reported in the new “nonexchange subsidies” section would be those that meet a proposed new definition of “subsidy,” which is “resources provided by another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods or services to be provided.” We do not believe the spectrum of transactions illustrated within the “nonexchange subsidies” heading in Illustration 5 (appropriations, taxes, grants, and gifts) would be consistently viewed in practice as corresponding with that definition.

We believe that evaluation of contributions and grants against the proposed definition would be particularly problematic. For example, we do not believe that preparers and practitioners would consistently conclude that all noncapital contributions would meet the “subsidy” definition because, if an individual donor makes a contribution to a public university to support scholarships to student athletes, it is unlikely that published tuition rates will be reduced as a result of such donations. Rather, the amount of money an individual student pays in relation to the published rates may be lower than the amount paid by other students. Such transactions are inherently different from state appropriations that are intended to result in keeping tuition rates lower for all students. Further, gifts (and grants) typically are made to support the costs of specific programs or to be used for general purposes, rather than to “keep rates lower than would otherwise be necessary.”

If nonexchange transactions are not deemed to meet the definition of subsidies, financing activities, or investing activities, they must by default be classified as operating revenue under the proposal. For the above reasons, we have concerns that the proposed definition of “subsidy” could actually result in greater diversity in classification than exists under the existing GAAP requirement to establish and disclose a policy for classification. Therefore, if the board decides to move forward with the proposed requirement to report the additional intermediate measure, we suggest that the guidance refer to “noncapital nonexchange transactions” instead of “noncapital subsidies,” and that the proposed definition of “subsidy” be removed.

Prior to moving forward with the proposal, we also suggest obtaining input from users of governmental business enterprise financial statements as to whether the additional prescriptive requirements would provide information that is significantly more useful and therefore, would justify the additional costs of providing and auditing that information. If it would not, we suggest that the board consider making use of the subtotal optional. Providing an option would allow entities that believe the further disaggregation helps them better tell their story to report that information, without unnecessarily burdening those who do not believe it would be helpful to users.

We have concerns that the proposal’s identification of “operating” revenue as the residual category could have other unintended consequences for government business enterprises that receive little or no nonexchange revenue (such as is the case for many healthcare providers). For example, while hospitals occasionally receive contributions from donors, these revenue sources tend to be immaterial. Today, governmental healthcare entities report noncapital contributions in the nonoperating section of the SRECNP, consistent with the reporting by other governmental entities. However, under the approach set forth in the PV, entities that receive insignificant amounts of noncapital nonexchange resources may ultimately decide to omit the new section for noncapital subsidies in their SRECNP based on materiality and a desire for consistency with their FASB counterparts. Since those revenues would not be considered financing or investing activities, these entities might reflect them as operating activity, which we believe is inconsistent with the board’s intentions. We believe this is an example of a situation when making the subtotals optional for governmental business enterprises might be useful, as it would allow those entities to report a single category of nonoperating revenue and expenses as they do today.

We presume that under the proposal, Pell grants from the federal government to students that are remitted directly to a higher education institution would be reported by the institution as nonoperating income in the “subsidies” or “noncapital nonexchange” transactions category. At present, governmental entities are required to reduce tuition revenue for the amount of Pell grants received and instead, reflect those resources as grant revenue. We believe that the reporting of those transactions by private and public sector entities should be consistent, and thus believe that public sector entities should report Pell grant resource inflows as payments on behalf of a customer that reduce the student’s receivable to the institution, and not as revenue for the institution. This view is consistent with those we expressed in our comment letter on the GASB’s Invitation to Comment, Revenue and Expense Recognition.

The Pell grant issue also illustrates the overlap between the GASB’s projects on revenue and financial reporting. We encourage the board to deliberate the accounting and presentation of various revenue streams as part of a single comprehensive project.