Risk Assumed – Phase II
FASAB Contact: Robin Gilliam, firstname.lastname@example.org, (202) 512-7356
The issuance of Statement of Federal Financial Accounting Standards (SFFAS) 51, Insurance Programs, on January 18, 2017, effectively concluded the first phase of risk assumed. For the history of the risk assumed project and milestones for phase I, please see http://www.fasab.gov/ra-insurance-programs/.
In phase II, the Board will holistically review significant risk events other than adverse events covered by SFFAS 51, Insurance Programs, to determine accounting standards that provide concise, meaningful, and transparent information regarding the potential impact to the fiscal health of the federal government.
HISTORY OF BOARD DELIBERATIONS (reverse chronology)
February 21-22, 2018
As part of the risk assumed project, the Board hosted an enterprise risk management (ERM) risk profiling education session. The panel discussed the following:
- Ms. SallyAnne Harper, a founding member and immediate past president of the Association for Federal Enterprise Risk Management (AFERM), provided a high-level review of federal ERM.
- Mr. Tom Brandt, the Chief Risk Officer at the Internal Revenue Service (IRS) and AFERM President Elect, presented a review of IRS’s risk profiling processes, including risk identification, categorization, assessment, quantification, measurement, and modeling.
- Mr. Mike Wetklow, Deputy Chief Financial Officer (CFO) and Division Director for Financial Management, National Science Foundation (NSF), presented NSF’s ERM implementation process, including a discussion about risk appetite as an integral part of risk profiling.
- Mr. Daniel Fodera, Lead Management Analyst, Program Management Improvement Team, Directors of Field Services, Federal Highway Administration (FHWA), explained the tools used in ERM risk profiling, including the use of a heat map at FHWA.
The Board learned the following main points:
- Risk assessment is integrated into strategic planning and investment decision making to determine priorities and objectives.
- Senior management is responsible for setting risk appetite to determine the most significant risks that could impact the organization’s strategic mission.
- Risk appetite includes an analysis of both the likelihood and impact of events.
- Most agencies are just beginning to develop their ERM processes; a few are moving into a more mature model.
Directly following the education session, the Board discussed whether to leverage ERM risk profiling as identified in OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control.
The Board agreed that staff should explore how to incorporate OMB A-123 risk profiling in the project; however members noted the following concerns:
- The Board should determine what type of risks to focus on: performance/programmatic—MD&A and/or financial impact—disclosure notes.
- The Board should determine what risks are not currently included in financial reports through working groups and determine the consequences of not including certain risks.
- The Board should consider producing best practices guidance if the standards are complete and agencies need additional help.
- The Board should prevent risk identification from turning into a compliance exercise that might affect the ERM process.
- The Board should consider how agency internal ERM processes might be affected by external financial reporting and the related audit.
Educational Session for February 2018 – Tab A (PDF)
Educational Session Presentation – (PDF)
December 20, 2017
The Board did not discuss the risk assumed project at the December 2017 Board meeting. However, staff continued to work on the gap analysis, including how to profile risks and user expectations.
October 25-26, 2017
According to the project objective, the risk assumed project strives … to determine accounting standards that provide concise, meaningful, and transparent information regarding the potential impact to the fiscal health of the federal government. However, understanding what risks affect U.S. financial sustainability and why they do is very challenging. Therefore, as part of the ongoing gap analysis, staff reviewed SFFAS 2, Accounting for Direct Loans and Loan Guarantees, to learn how risk is currently disclosed in the financial statements.
Staff conducted research with the Department of Education, Department of Housing and Urban Development, Small Business Administration, and the Government Accountability Office and learned that agencies cannot specifically identify their users. In addition, reporting is inconsistent, extremely detailed, and burdensome. This not only affects preparers, but also users.
On October 26, 2017, staff presented these findings at the Board meeting to determine if members wanted to pilot amendments to SFFAS 2 to develop a framework for how to address risk assumed holistically.
Members agreed and requested that staff
- identify user groups to analyze risk factors, beyond those used to calculate credit subsidy reestimates, to help build a risk profile;
- develop a framework for how to discuss measurement uncertainty;
- consider how to discuss the “why” behind the “what” of risk;
- present sensitivity analysis at a future meeting; and
- pilot amendments to SFFAS 2 to develop a model/framework for how to address risk assumed holistically.
Issue Paper for October 25-26, 2017 – Tab G (PDF)
August 30-31, 2017
The Board did not discuss the risk assumed project at the August Board meeting. Staff has been researching the reporting and disclosures for direct loans and loan guarantees, one of the risk assumed categories under consideration for update. Staff thanks the Department of Education, the Department of Housing and Urban Development’s Federal Housing Administration, and the Small Business Administration for meeting to discuss their credit models and reporting. Agency information will be consolidated and presented to the Board.
June 21-22, 2017 Board Meeting
At the June 22, 2017, Board meeting, members discussed focus group feedback to determine which suggestions should be included in risk assumed reporting.
Members do not want to include
- discussions that predict unforeseen catastrophes and their potential financial impact;
- trends for using emergency funding as an indicator of fiscal exposure to risk shocks;
- comparisons of estimates to actuals; or
- management of past risk events.
Members do want to
- include past events that affect the current financial position; and
- include and define major risk events with a relationship to long-term sustainability that are not already reported.
Members also reviewed the USAFacts 10-K risk section—Item 1A Risk Factors—to determine if it was an appropriate model for reporting risk assumed in the federal financial report. Members did not favor a separate risk section. They did want meaningful, streamlined information presented as a broad analysis, rather than specific details within already existing disclosures. Members agreed to continue using the risk exposure categories provided in tab G, appendix C as a foundation for the ongoing gap analysis.
Issue Papers for June 2017 – Tab G (PDF)
April 26-27, 2017 Board Meeting
The Board did not discuss the risk assumed project at the April 2017 Board meeting. However, staff did hold two focus groups, one with Government Accountability Office experts and one with non-federal experts, to gauge understanding of the current risk assumed information provided in the government-wide financial reports. Staff thanks participants for sharing their insights. This information will be consolidated and presented to the Board as part of the gap analysis.
February 22, 2017
This project was not discussed at the February 2017 meeting.
December 19-20, 2016
At the December 20, 2016, Board meeting, the Board approved a framework for the risk assumed gap analysis. Members agreed that categories should not be a laundry list of events but instead should be principle-based and broad enough to encompass current and future significant risk events. The scope will include past and future events and whether uncertainty is adequately explained. Staff will review past financial reports to understand what was included before and after recent large events, such as the 2008 financial crisis, at the agency and government-wide levels.
Staff will utilize roundtable discussions to discover if current disclosures are clear, relevant, and add value in relation to the available standards. If roundtable participants do not feel that current disclosures are clear, relevant, or valuable, the group will discuss what is missing and should be included.
Staff will work on the gap analysis over the next several months and present findings and recommendations to the Board upon completion.
Issue Paper for December 2016 – Tab G (PDF)
October 19-20, 2016 Board Meeting
At the October 19, 2016, Board meeting, the risk assumed – phase II began.
The Board reviewed staff’s high-level gap analysis presented in table 1: Analysis of Federal Accounting Standards in Relation to the IMF [International Monetary Fund] Recommendations for Disclosing Fiscal Risks and table 2 from the Australian Statement 8: Statement of Risks.
The Board agreed that an extensive gap analysis is necessary to determine the risk information that the consolidated financial report of the U.S. Government includes and how it is presented, the extent to which FASAB can align with enterprise risk management (ERM), and the Board’s preference for presenting risk assumed information going forward.
For the gap analysis, the Board agreed to determine the following:
- If federal government reporting is transparent enough for estimates and uncertainty around significant risks with a focus on broad risk categories, such as an economic downturn where revenues go down and benefit program costs go up
- If there is a significant gap in reporting to be addressed for individual risk items, such as treaties, commitments by the federal government, and inter-governmental dependencies with state and local governments
- How to present summarized risk events at the government-wide level for cross-cutting agency efforts, such as disaster relief, with access to detail at the agency level
In relation to FASAB aligning with the ERM effort, the Board recognizes that agencies are in different phases of development and implementation of ERM. The Board understands that ERM is not a CFO finance-focused project, but there are questions about who is doing the risk assumed project for the whole government. Therefore, FASAB appreciates agencies’ efforts and their willingness to share their progress to determine if FASAB’s risk assumed project can align with ERM.
In conclusion, staff will develop a gap analysis for discussion over a number of future Board meetings to determine how to present risk assumed information going forward.
Issue Paper for October 2016 – Tab 2