Note X - Certain Risk Disclosures
A template for this note is not available. See “Instructions to preparer:” for various disclosures that may be required.
Instructions to preparer:
This disclosure is required only if all the following criteria is met:
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A concentration or constraint is known before the financial statements are issued
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The concentration or constraint makes the government (or fund) vulnerable to the risk of substantial impact
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An event associated with the concentration or constraint that could cause substantial impact has occurred, started to occur, or is 50% or more likely to occur within 12 months after the financial statements are issued
The disclosure criteria should be evaluated for the primary government. However, if any funds report a liability for revenue debt, the disclosure criteria should also be evaluated in the context of those individual funds.
Concentration: A lack of diversity related to an aspect of a significant inflow of resources or outflow of resources. Examples include, but are not limited to, a lack of diverse employers, industries, workforce, or suppliers.
Constraint: A limitation imposed on a government by an external party or by formal action of the government’s highest level of decision-making authority. Examples include, but are not limited, to limitations on raising revenue, spending, or incurring debt. Mandated spending may also be a constraint.
If all the disclosure criteria are met, however the government takes mitigating actions prior to the issuance of the financial statements that cause any of the disclosure criteria to no longer be met, a disclosure would no longer be required.
Note: if the contents required of this note are disclosed as part of another note disclosure, the notes can be combined to avoid unnecessary duplication.
Disclosure contents:
For each concentration or constraint that meets all the disclosure criteria, the required disclosure should describe:
a) The concentration or constraint
b) Each event associated with the concentration or constraint that could cause a substantial impact if the event had occurred or had begun to occur
c) Actions taken by the government prior to the issuance of the financial statements to mitigate the risk.
The disclosure should provide adequate detail of the circumstances and vulnerability for a reader to understand the risk and the impact to the government.
Example notes:
Ex. a. Concentration of Financial Resource Provider
The Airport Fund accounts for the (City/County/District) airport operations and reports $X million of revenue bonds outstanding on December 31, 20XX. The bond indentures state that the revenue generated by airport operations is pledged as the sole source of repayment for the bonds. XX percent of the Airport Fund’s revenues are associated with a single airline customer who has notified the (City/County/District) that it plans to terminate its lease and discontinue service to the (City/County/District)’s airport by March 31, 20XX. A loss of revenue from that airline could adversely affect the Airport Fund. (Note: in this example the government has not taken any mitigation actions, therefore this note does not provide a description of the mitigating actions).
Ex. b. Concentration of Employer
Employer A is a large employer in (City/County/District) that employs nearly (number of employees) personnel. The various tax revenues received by the (City/County/District) directly or indirectly related to the operations of Employer A represent XX percent of the (City/County/District) resources for the year ending December 31, 20XX. On November 30, 20XX, Employer A initiated closure of its facilities in the (City/County/District) and are expected to complete all of the closure actions within six years. The Governing Body has approved various economic incentives aimed at encouraging the redevelopment of the property associated with Employer A.
Ex. c. Constraint: Mandated Spending
The (City/County/District)’s wastewater treatment operations are subject to environmental regulations established by the State Department of Ecology. The Department of Ecology had proposed new regulations that would require reducing the allowable level of certain pollutants in the wastewater treatment plant’s discharge by one-third. If adopted, the (City/County/District) would be responsible for complying with the regulations by modifying the plant at a substantial cost to its ratepayers by September 20XX.
On June 15, 20XX, the Board approved an increase in the rates charged to private and commercial customers to partially address improvements to the wastewater treatment plant aimed at reducing pollutants.