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February 26, 2021
Mr. David R. Bean
Director of Research and Technical Activities
Governmental Accounting Standards Board
401 Merritt 7, PO Box 5116
Norwalk, CT 06856-5116
RE: Project No. 3-25
Dear Mr. Bean:
PricewaterhouseCoopers LLP appreciates the opportunity to comment on the GASB’s Exposure Draft, Financial Reporting Model Improvements (the “ED”). Our comments focus on the changes to the proprietary financial reporting model, 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).
We have concerns with the proposed definition of “subsidy.” Without clarification, we believe the proposed definition, copied below, will lead to significant diversity in practice and increased inconsistency in financial reporting.
“Subsidies are (a) resources received from another party or fund to keep rates lower than otherwise would be necessary to support the level of goods and services to be provided or (b) resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided.”
We do not disagree with the GASB’s proposed presentation of subsidies, but caution that unless revised, the definition will not achieve the intended financial reporting outcome. To realize its goal, the Board must expand the definition beyond rate-setting to encompass nonexchange transactions that do not impact rate-setting. If the definition remains as proposed, we expect that significant implementation guidance will be required. Expanding the definition as we suggest will lead to more consistent financial reporting as opposed to issuing future implementation guidance that addresses narrow-scope questions regarding the intent of the definition.
The proposed definition’s focus on rate setting will be confusing for many business-type governments since nonexchange revenues (e.g., grants, contributions, transfers) often do not directly impact the fees the entities charge to customers. Unlike common business-type activities reported in the proprietary funds of general-purpose governments, such as water utilities and public transportation, where rates are subsidized for public mission or public policy reasons, standalone governmental business enterprises often charge rates that are competitive in open markets.
The PV included an example statement of revenues, expenses, and changes in net position for a public university that presented grants and contributions as noncapital subsidies; however, this example was not brought forward into the ED. We recommend including the example in the final standard. Without it, it is not clear that noncapital grants and contributions generally meet the definition of subsidies. Adjustments to existing Q&As, such as 7.72.8 and Z.42.4, also do not make clear how to determine whether grants meet the definition of subsidies.
We believe that it will be especially challenging to evaluate whether contributions and grants meet the proposed definition of subsidies. 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.” For example, a public university may plan to expand a program in the future when it amasses sufficient resources to do so based on its current rates. If a grant or contribution provides those resources, allowing the university to immediately expand the program, those funds have had no impact on the rates it charges its customers, nor would charges have been higher absent the grant/contribution. It is unclear if the Board intended that the contribution in this example would meet the definition of a subsidy. We could argue that in order to expand the program immediately, the university would have had to charge higher rates. However, this is often not the case. In addition, many grants and contributions fund ongoing activities of a governmental business enterprise that would otherwise be discontinued. Distinguishing between those grants and contributions which may affect rates, and those that may not, would require significant judgment. Many standalone governmental business enterprises have sufficient resources to fund any number of programs at any given time, but management makes decisions about how to best allocate those resources, save for the future, and prioritize initiatives. We do not believe it is clear how to interpret the definition of subsidies in relation to these situations.
The only change made to the subsidy definition from the PV was to add the notion that “resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided” are subsidies. We assume this change was meant to encompass “subsidies” made by business-type activities to other entities or funds, but we do not believe this definition will be interpreted as the GASB intends. For example, academic medical centers often transfer resources to their associated medical schools and tribal casinos usually transfer resources from their casino enterprises back to the tribal government. However, we do not believe these entities charge higher rates in order to fund these transfers. These are examples of governmental businesses that base their rates on open market transactions and would not set rates lower absent the relationship with another governmental entity. Therefore, based on the proposed definition, it may be concluded that these transfers are not subsidies.
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. 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.
Other comments
Cash flow statement presentation
It appears that the amendments to Q&A 2.18.2 will contradict the answer in Q&A 2.18.1 for governments whose principal ongoing operations constitute activities that otherwise would be reported as nonoperating. If a foundation’s primary purpose is receiving contributions and investing the proceeds, paragraph 32 of the ED would allow that entity to report those activities as operating revenues. In the cash flow statement, Q&A 2.18.1 indicates that the nature of a government’s operations does not dictate cash flow presentation and that the entity must evaluate whether the activities meet the definition of noncapital financial, capital and related financing, or investing. However, the amended Q&A 2.18.2 definitively states that all activities reported as part of operating income should be included in operating activities in the cash flow statement. If the GASB intends for entities to report transactions in operating activities that otherwise meet the definition of a different cash flow statement category if those transactions represent their primary operations, we believe the answer to Q&A 2.18.1 requires amendment.
Pell grants
We agree with the proposed amendment to Q&A 7.72.10 regarding Pell grants received by business-type governments. Pell grants do not impact the tuition that higher education institutions charge their students. Rather, these grants are payments against established tuition rates and should be presented as part of tuition revenue.
Linkage with Revenue and Expense Recognition
We will submit a separate comment letter on GASB’s Preliminary Views, Revenue and Expense Recognition (RER). Many governments are just as concerned about presentation of their flows statement as they are about recognition and measurement of the activities in that statement. Governments involved in business-type activities, many of which compete for resources with private sector entities, are particularly concerned about whether revenues and expenses are presented as operating or nonoperating. It is difficult to assess the changes proposed in the ED without a clear understanding of the results of RER, particularly since there are significant issues still to be discussed on that project. We also do not believe that there is a pressing need for issuance of the ED and therefore recommend that the Board combine the two projects. We think a single project that provides a holistic view of revenue and expense recognition, measurement, and presentation would be beneficial to many stakeholders.
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If you have any questions regarding our comments, please contact Heather Horn at, Christina Dutch at, or Chris Salem at

PricewaterhouseCoopers LLP

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