Commitments

FASAB Contact: Sherry Lee, LeeSL@fasab.gov

Background

FASAB has issued pronouncements on specific types of commitments; however, there is no Statement on general commitments. Office of Management and Budget Circular A-136, Financial Reporting Requirements, includes guidance requiring federal agencies to disclose commitments related to “binding agreements that may result in the future expenditure of financial resources that are not recognized or not fully recognized on the Balance Sheet and should be disclosed.”

As part of FASAB’s overall reexamination of existing standards, the Board will consider developing an accounting Statement that defines commitments and develops guidance on reporting general commitments.

HISTORY OF RESEARCH

May 2024

Staff is currently researching further on differentiating between commitments and contingencies and on defining and classifying federal commitments.

February 21-22, 2024

At the February 2024 meeting, staff presented the similarities and differences between commitments and contingencies based on characteristics identified from the working definition of commitments and the definition of contingencies in SFFAS 5, Accounting for Liabilities of the Federal Government. Staff also illustrated the commitments and contingencies liability recognition process. The Board generally agreed with the general direction of the similarities and differences analysis, with one member partially agreeing. The member agreed that some agreements to enter into future transactions are clearly commitments or contingencies.

One member noted that certain agreements to enter into future transactions, particularly when there is a prior exchange type transaction that is an executory contract, may be either commitments or contingencies as they involve the likelihood of a future event taking place. The member suggested staff research both exchange-like and non-exchange-like commitment transactions.

The Board seemed to split on whether to amend SFFAS 5 to include commitment as part of the annual omnibus or as part of the SFFAS 5 reexamination project. Members supporting commitments as part of the reexamination project did not see the urgency as agencies are reporting commitments per Office of Management and Budget (OMB) requirements. Members supporting commitments as part of the annual omnibus pointed out that there may be issues, such as software technology and international agreements or treaties, to address sooner.

The Board unanimously agreed on continuing the research to develop a working definition for commitments to help distinguish from contingencies.

Briefing Materials – Topic B

December 12-13, 2023

At the December 2023 meeting, staff discussed characteristics of commitments by examining whether commitments meet the liability definition in SFFAC 5, Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial Statements, and the liability recognition criteria in SFFAS 5, Accounting for Liabilities of the Federal Government.

SFFAC 5 lists two essential characteristics of a liability: (1) present obligations and (2) settlement of obligations. Commitments are binding agreements that are not present obligations but may be future obligations of the federal government if criteria or conditions specified in the agreements are met. As there are no present obligations, there is no settlement of those obligations. Thus, commitments do not meet the liability definition in SFFAC 5.

In the briefing materials, staff analyzed various commitments and determined that they may be exchange or non-exchange transactions. SFFAS 5 describes the liability recognition point for exchange and non-exchange transactions.

Staff also discussed the differences between commitments and contingencies.

Current guidance on commitments is issued by the Office of Management and Budget. Due to the potential significant effect on the future budget of the federal government, staff recommended that the Board consider level A guidance on commitments (potentially as amendments to SFFAS 5).

A few members expressed concern about resource constraints but generally agreed that, for accountability and transparency, the community needs level A guidance. An omnibus amendment to SFFAS 5 would provide consistent reporting of commitments. Members suggested clearly differentiating between contingencies and commitments.

Briefing Materials – Topic E

August 16-17, 2023

At the August meeting, the Board reviewed the pre-research on commitments and agreed to add commitments to the technical agenda as a research topic.

Briefing materials – Topic E