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Statement of Federal Financial Accounting Standards 20:
Elimination of Certain Disclosures Related to Tax
Revenue Transactions by the Internal Revenue Service,
Customs, and Others, Amending SFFAS 7, Accounting for
Revenue and Other Financing Sources
Status
Summary
Statement of Federal Financial Accounting Standards (SFFAS) 7, Accounting for Revenue
and Other Financing Sources, became effective in fiscal year 1998 and included detailed
provisions that apply to entities collecting taxes on behalf of the Federal Government. The
two entities collecting the vast marjority of federal taxes are the Internal Revenue Service
(IRS) and the U.S. Customs Service (Customs).
The Board is issuing this standard to rescind paragraph 65.2 of SFFAS 7. Absent very
detailed explanations, the provisions of paragraph 65.2 could result in information being
given to readers of the financial statements that they might misinterpret. The Board
believes that paragraph 65.2 would not accomplish what it purports to accomplish, and
would impose costs unnecessarily on both the preparer and auditor without a significant
benefit. The Board's reasoning is explained more fully in Appendix A, Basis for Conclusions.
This amendment is effective for periods beginning after September 30, 2000.
Issued September 29, 2001
Effective Date
For periods beginning after September 30, 2000.
Affects
SFFAS 7
Affected by
None.
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Introduction
Purpose
1. This standard rescinds paragraph 65.2 of Statement of Federal Financial Accounting
Standards (SFFAS) 7 and makes other conforming changes.
Background
2. SFFAS 7 became effective in fiscal year 1998 and included, along with other provisions,
detailed provisions that apply to entities collecting taxes on behalf of the Federal
Government. Paragraph 65.2 of that standard required disclosure of “revenue-related
transactions affecting the beginning and end-of-period balances of accounts receivables,
accounts payable for refunds, and the allowance for uncollectible amounts.”
3. Subsequent to the issuance of the standard questions arose as to the usefulness of the
information as well as to the practicality of producing it. After discussing the issues and
options, the Board issued, in November 1998, an exposure draft of a standard rescinding
paragraph 65.2. Ultimately, the Board agreed that more study was needed, and in January
1999 it deferred the effective date of paragraph 65.2 until October 1, 2000 (SFFAS 13,
Deferral of Paragraph 65.2 – Material Revenue-Related Transactions Disclosures).
4. In November 2000, the Board issued a second exposure draft, Elimination of Disclosures
Related to Tax Revenue Transactions by the Internal Revenue Service, Customs, and
Others, Amending SFFAS 7. Based on comments received and further consideration, the
Board is now rescinding paragraph 65.2.
Effective Date
5. This amendment is effective for periods beginning after September 30, 2000.
Accounting Standard
6. Paragraph 65.2 of SFFAS 7 is repealed and rescinded.
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7. Other conforming changes:
a. The last sentence of paragraph 107 of SFFAS 7 is changed to delete “65.2 and” from
the parenthesis.
b. The last sentence of footnote 41, paragraph 187.1 of SFFAS 7 is changed to delete “in
its disclosures required by para. 65.2”.
The provisions of this Statement need not be applied to information if the effect of applying the
provision(s) is immaterial. Refer to Statement of Federal Financial Accounting Concepts 1,
Objectives of Federal Financial Reporting, chapter 7, titled Materiality, for a detailed discussion
of the materiality concepts.
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Appendix A: Basis For Conclusions
This Statement may be affected by later Statements. The FASAB Handbook is updated annually
and includes a status section directing the reader to any subsequent Statements that amend this
Statement. Within the text of the Statements, the authoritative sections are updated for changes.
However, this appendix will not be updated to reflect future changes. The reader can review the
basis for conclusions of the amending Statement for the rationale for each amendment.
8. This appendix summarizes some of the considerations deemed significant by the Board in
reaching the conclusions in this Statement. It includes the reasons for accepting certain
approaches and rejecting others. Individual members gave greater weight to some factors
than to others.
9. The Board issued an exposure draft in November 1998 proposing to rescind paragraph
65.2. Comments were received during a minimal comment period that ended December 12,
1998. In January 1999, the Board deferred the effective date of paragraph 65.2, SFFAS 7,
until October 1, 2000.
1
10. In December 1998, the Board agreed that further study was needed regarding the relevance
of the information discussed in paragraph 65.2. Additionally, the Board was concerned
about the relatively short exposure period (approximately 30 days) for the ED. The Board
decided to defer the effective date for implementing paragraph 65.2 and revisit the issue of
eliminating the requirement at a later date.
11. Following the decision to defer the disclosure requirement, the Board did not take up
research on the issue immediately. In December 1999, the Board reviewed its agenda and
weighed whether it should devote scarce resources to this issue or simply allow the
provisions of paragraph 65.2 to take effect for fiscal year 2001 financial statements. To
assist in making this decision, the Board sent a letter to the Internal Revenue Service (IRS)
asking what additional information might be available to aid the Board in considering the
issue.
12. The IRS responded with additional information based on its two additional reporting years’
experience with SFFAS 7 requirements. In addition, the IRS provided a briefing to the
Board regarding its collections process and systems modernization. The IRS renewed the
request that the Board rescind the provisions of paragraph 65.2. Its auditor, the General
Accounting Office, supported this rescission.
1
SFFAS 13, Deferral of Paragraph 65.2 – Material Revenue-Related Transactions Disclosures, Amending SFFAS 7
Accounting for Revenue and Other Financing Transactions, January 1999.
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13. In November 2000, the Board issued a second exposure draft, Elimination of Disclosures
Related to Tax Revenue Transactions by the Internal Revenue Service, Customs, and
Others, Amending SFFAS 7, that proposed to eliminate paragraph 65.2. Because of the
interest in the relevance of this information, the Board mailed copies to potential users, for
example, Congresspersons and staff directors of key committees. The Board received
comment letters on the exposure draft from the following sources:
Responses to the Exposure Draft
14. The respondents were closely divided with the majority supporting the proposed elimination
of paragraph 65.2. It is important to note that the Board did not rely on the number in favor
or opposed to a given position. Information about the majority view is provided only as a
means of summarizing the comments. The Board considered the arguments in each
response and weighed the merits of the points raised. The Board summarizes the
respondents’ arguments below.
Respondents Supporting the ED
15. Several respondents stated that paragraph 65.2 disclosures would not be useful, and could
be misleading, to general purpose readers. A respondent stated that any attempt to
reconcile the elements required by paragraph 65.2 could be misleading due to timing
differences between assessments and collections and the definitions of revenue receipts
and taxes receivable.
16. Some respondents said that the IRS currently provides sufficient detailed information about
federal tax revenues, unpaid assessments, and refunds in its annual financial report through
footnote disclosures, supplementary information and in its management’s discussion and
analysis (MD&A). Other respondents said that the disclosure requirements of paragraph
65.2 far exceed what should be required in general purpose financial statements. Another
respondent concurring with the elimination of paragraph 65.2 stated that FASAB clearly
documented its case in the ED’s basis for conclusions.
Federal
(internal)
Nonfederal
(external)
Users, academics, others 2
Auditors 2 1
Preparers and financial managers 4
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Respondents Opposing the ED
17. Other respondents had a different view. One respondent stated that the disclosure in
SFFAS 7 was intended to overcome some of the practical limitations of the tax collection
system and make the tax revenue recognition closer to what would be reported with fuller
accrual accounting. He submitted that the information required in paragraph 65.2 is
relevant and useful in assessing the efficiency and effectiveness of the tax system, not
merely the administrative practices, and can be explained satisfactorily so as not to be
misleading.
18. Several respondents stated that insufficient evidence has been offered regarding the lack of
relevance and understandability of the information to warrant eliminating the paragraph 65.2
disclosures, and doing so would weaken SFFAS 7. These respondents recommended
extending the deferral period for the standard, further research, and a hearing, as
necessary, prior to the issuance of a final standard. One respondent stated that the ED did
not convincingly explain why the information called for in paragraph 65.2 is so complex that
it could not be clearly explained. The respondent stated that SFFAC 1, par. 158, provides
that general purpose financial reports should not exclude essential information merely
because it is difficult to understand or because some report users choose not to use it.
The Board’s Discussion
19. In conjunction with re-deliberating the issues presented in the exposure draft and carefully
considering the respondents’ comments, the Board notes that SFFAS 7 represents a major
accomplishment in establishing federal accounting standards. SFFAS 7 presents standards
for classifying, recognizing, and measuring resource inflows as well as concepts for financial
reporting and makes other significant contributions. Many provisions of that statement are
now fundamental to federal accounting. However, the Board believes that paragraph 65.2
of SFFAS 7 is flawed because the information required therein might be misinterpreted,
would not accomplish what it purports to accomplish, and would be difficult to produce.
Information that Could Be Misinterpreted
20. Paragraph 65.2 requires disclosure of information about the beginning and ending balances
of accounts receivable and related accounts, as well as material types of revenue
transactions that relate to the collecting entity’s custodial responsibilities. The minimum
information required would include “assessments by the entity,” “penalties,” “interest,” and
“abatements.” In the two exposure drafts on this issue (November 1998 and November
2000) the Board has discussed the complexity of the assessment and abatement process.
The Board has discussed the various IRS-initiated tax collection actions, including
compliance assessments; the enforcement work-in-process status of the assessment
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database; the possible timing difference between the period to which the tax relates, the
eventual assessment of the tax and penalties and interest, and the final collection or
abatement of the assessment; and other complicating factors. Many assessments,
penalties, and interest are made for enforcement purposes, are often overstated due to
incomplete information, and are subject to change based on receipt of additional information
from the taxpayer. Thus, they do not always precede a receivable
2
in an accounting sense.
The Board believes that the user could misinterpret assessment reporting because
increases or decreases in assessments do not lead necessarily to increases or decreases
in receivables or revenue. Further, developing meaningful categories of assessments that
would permit a user to analyze whether enforcement assessments are likely to lead to
revenues would not be cost-beneficial when one considers the remaining reporting required
under SFFAS 7 as amended.
21. The Board also has discussed the complications of the abatement process. Abatement is a
reduction or cancellation of an assessed tax. Abatements are made for myriad reasons and
in some cases there is no correlation between the original assessment and the final reason
for the abatement. For example, taxpayers can carry back losses to prior years and reduce
prior year taxes that were correctly assessed by the IRS. Such reductions are classified as
abatements but are not the same as abatements where the tax assessment itself was in
error.
22. Moreover, taxpayers also file amended returns that can require abatement of the original
amount they reported, including taxpayer requests to abate particular types of penalty
assessments due to reasonable causes. For example, during 1998 a new law required the
IRS to disallow certain dependents and credits claimed if the taxpayer did not include a
social security number for a dependent child or a taxpayer identification number for a child-
care provider. In each case the IRS posted an assessment, accrued penalties and interest
pending provision of the information, and subsequently abated the assessment when the
taxpayer provided the required verification. This change in law increased the total
assessments, interest, penalties, and abatements to enforce a reporting requirement rather
than to collect additional tax revenue. One could be misled since both assessments and
abatements were “overstated” in the sense that it was anticipated at the time of assessment
that, in the majority of cases, the assessment would be abated.
23. There are many different reasons for abatements with varying transactions potentially
covering 10 years of assessments, each affecting the balances to be disclosed under
paragraph 65.2. The Board believes that reporting on total assessments, including penalties
2
Per SFFAS 7, paragraph 53, accounts receivable should be recognized when a collecting entity establishes a
specifically identifiable, legally enforceable claim to cash or other assets through its established assessment process
to the extent the amount is measurable.
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and interest thereon, and abatements could be misinterpreted in the context of disclosures
purporting to be transactions affecting the beginning and ending balances of accounts
receivable and related accounts. Moreover, the Board believes that attempts to reconcile
the elements required in paragraph 65.2 could be misinterpreted due to timing differences
between assessments and collections and the definitions of revenue receipts and taxes
receivable.
24. The Board concludes that the paragraph 65.2 information is not relevant for reconciling the
beginning and ending balances of accounts receivable and related accounts, which
paragraph 65.2 purports to do. Some of the required information is beyond the scope of
those accounts since activity does not result in or relate to revenue or receivables, precedes
the recognition of taxes receivable, or relates solely to tax administration or enforcement.
25. When considering whether to retain paragraph 65.2, the Board considered the materiality of
taxes receivable. The IRS’ taxes receivable are not large in relation to annual tax revenue.
For FY2000, approximately $20 billion in IRS receivables represent three days of
collections.
Other Information Required
26. The Board calls attention to other SFFAS 7 paragraphs and to other FASAB standards that
require disclosures and supplemental information that the Board believes accomplish the
objectives of SFFAS 7 as stated in paragraph 187.1 and elsewhere. Paragraph 65.1
requires disclosure of factors affecting collectability and timing of categories of accounts
receivable and the amounts involved. Paragraph 65.3 requires disclosure of cumulative
cash collections and refunds by tax year and tax type. Paragraph 67 requires supplemental
information about the estimated realizable value of compliance assessments and pre-
assessment work-in-process; about other claims for tax refunds that are not yet accrued but
are likely to be accrued when administrative actions are completed; and, about the amount
of assessments that the entity still has statutory authority to collect but that have been
written off and thus excluded from accounts receivable. SFFAS 15, Management’s
Discussion and Analysis, requires discussion, among other things, of performance goals,
objectives, results, systems, controls, and legal compliance.
Conclusion
27. The Board actively sought comments from potential users. In addition to the FASAB
distribution list, the Board sent the ED to all those who had commented on the prior ED of
November 1998 and to potential decision-makers, including especially House and Senate
committees and sub-committees. Also, in setting February 16, 2001, as the cut-off date for
comments, the Board provided an extended period for respondents to submit comments.
Despite the Board’s efforts to reach users the response to the ED did not demonstrate a
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demand from users to have the information. Only one respondent said the information was
useful and necessary. Other respondents who oppose eliminating paragraph 65.2 at this
time said that the Board did not offer enough evidence regarding relevance and
understandability to warrant eliminating paragraph 65.2, not that they themselves found it
useful or relevant and for what purposes. Due to the cost of the information, the availability
of other information on this topic, the requests from the preparer and auditor communities,
and lack of a response from users of the information, the Board does not believe the
paragraph should be retained.
28. The Board believes that sufficient evidence has been produced to conclude that the
information required by paragraph 65.2 could be misinterpreted by users of general purpose
financial statements and that it does not accomplish what it purports to accomplish. The
Board does not exclude essential information merely because it is difficult to understand or
because some report users choose not to use it. In this instance, however, the complexity
of the tax collection process in conjunction with the context of accounts receivable
reconciliation renders paragraph 65.2 defective and, therefore, not relevant. The objective
of SFFAS 7 is to tell users what is happening at the tax collection entities, and the Board
believes the standard is achieving this objective without paragraph 65.2, and that paragraph
65.2 could in fact be misinterpreted. This amendment of SFFAS 7 is limited to the problem
of disclosures in paragraph 65.2 being misinterpreted.
Vote for Approval
29. The amendment of SFFAS 7 prescribed in this statement is approved by a vote of seven
members in favor and one member dissenting (only eight members voted due to a vacancy
on the Board). The dissent is available for review at the FASAB offices.
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Appendix B: Paragraph 65 of SFFAS 7
65. Entities that collect taxes and duties should disclose the following relating to future cash
flows, revenue-related transactions, and custodial responsibilities:
65.1 Accounts receivable. Factors affecting collectibility and timing of categories of
accounts receivable and the amounts involved.
65.2 Material revenue-related transactions. Revenue-related transactions affecting the
beginning and end-of-period balances of accounts receivable, accounts payable for
refunds, and the allowance for uncollectible amounts should be disclosed. All material
types of revenue transactions which relate to the custodial responsibilities of the
collecting entities should be disclosed. The disclosure should be comprehensive
enough to include as a minimum: self-assessments by taxpayers (or importers);
assessments by the entity; penalties; interest; cash collections applied to taxpayer
accounts and unapplied collections; refunds, refund offsets, and drawbacks;
abatements; accounts receivable written off during the reporting period as
uncollectible; and provisions made to the allowance for uncollectible amounts.
65.3 Cumulative cash collections and refunds by tax year and type of tax. Cash
collections and refunds by tax year and type of tax should include cash collections and
cash refunds for the reporting period and for sufficient prior periods to illustrate (1) the
historical timing of tax collections and refunds, and (2) any material trends in collection
and refund patterns. Sufficient prior periods for each type of tax are the periods which
end when the statutory period for collection ends. Collecting entities may shorten these
periods if evidence for prior tax years indicates that a shorter period would reflect at
least 99 percent of the collectible taxes.
