Revenue Recognition for Government Recipients of National Opioid Settlement Funds

February 14, 2023
Money with buildings in background

The national opioid settlement that was finalized in March of 2022 clears the way for potentially billions of dollars to nearly every state and local government in the U.S. Government entities may be receiving funds until 2040.

As each state and local government has different roles in the distribution of the funds, there is no “one size fits all” rule of revenue recognition. However, there is good news — the existing GASB revenue recognition framework addresses the accounting for receipt of direct settlement payments and grants.

Your Government is a Named Party in the Settlement Agreement

A “litigating party” refers to state and local governments listed in the settlement agreement. For these governments, settlement receipts are likely exchange transactions. This is based on the notion the payments are made to the settling governments in exchange for their agreement to release the drugmakers and distributors from present and future litigation.

To the extent deemed collectible, litigating parties will recognize the entire exchange transaction settlement as a receivable and revenue as of the settlement date. In governmental funds, following the modified accrual basis of accounting, litigating parties will recognize the revenue to the extent it is considered measurable and available. For the government-wide statements (and proprietary funds), revenue would be recognized immediately to the extent it is collectible.

A word of caution — the federal agreement was in March of 2022, so be sure to check with your legal counsel to confirm your entity’s settlement date.

Time Requirements and Purpose Restrictions

Governmental accounting distinguishes between two kinds of stipulations on the use of resources: time requirements and purpose restrictions.

  • Time requirements specify the period (or periods) when resources are required to be used or when use may begin. Time requirements affect the timing of recognition of nonexchange transactions. Resources received before time requirements are met, but after all other eligibility requirements have been met, should be reported as a deferred inflow of resources by the recipient.
  • Purpose restrictions specify the purpose for which the resources should be used. Purpose restrictions do not impact when revenue from a nonexchange transaction is recognized. Instead, purpose restrictions result in the reporting of restricted net position or fund balance until the funds are used in accordance with the restriction.

Grant Revenue for “Non-Litigating” Parties

“Non-litigating” parties (other than those named directly in the settlement agreement) follow revenue recognition rules for nonexchange transactions. Nonexchange transactions may be government-mandated or voluntary, but the accounting is similar for both.

For government-mandated and voluntary nonexchange transactions, the provider government may establish eligibility requirements that affect revenue recognition. Resources received before eligibility requirements are met (excluding time requirements) should be reported as liabilities by the recipient.

Types of eligibility requirements include:

  • Does my government possess the “required characteristics” of recipients?
    The provider specifies specific characteristics for the recipient or secondary recipient. For example, recipients must be states and secondary recipients must be counties.
  • Is this a “reimbursement” grant?
    The provider offers resources on a reimbursement (expenditure-driven) basis and the recipient has incurred allowable costs under the applicable program.
  • Are there other “contingencies” we must satisfy?
    This applies only to voluntary nonexchange transactions. The provider offers resources contingent upon a specified action of the recipient, and that action has occurred. For example, the recipient must raise a specific amount of resources from third parties or dedicate its own resources for a specified purpose and has complied with those requirements.
  • Have the time requirements been met?
    As noted previously, resources received before time requirements are met, but after all other eligibility requirements have been met, should be reported as a deferred inflow of resources by the recipient.

To the extent deemed collectible, and as all applicable eligibility requirements are met, non-litigating parties will recognize a portion of the settlement agreement as a receivable and revenue after the settlement date.

Following the modified accrual basis of accounting in governmental funds, both litigating and non-litigating entities will recognize the revenue to the extent it is considered measurable and available; agencies will report a considerable “unavailable revenue” at the outset.

Determining the Revenue Accounting Treatment

Given these considerations, it is vital for governments to carefully consider the specific terms of their opioid settlement agreement when determining the revenue accounting treatment. In some cases, it may be appropriate to recognize a portion of the settlement revenue in the year the settlement is reached, with the remainder recognized in future years as the conditions for recognition are met.

Determining how to best recognize revenue from the opioid settlement agreement can be complex. Our government advisory team can help guide you through the process.

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