The settlement of an age discrimination lawsuit

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1. Which of the following do you think a city should report as an “extraordinary” or a “special” item assuming that they are material in amount:
a. The settlement of an age discrimination lawsuit
b. The sale, at a sizable gain, of city‐owned land to a private developer
c. The unreimbursed cost of providing housing and other assistance to hurricane victims who have relocated from other areas
d. A major donation, which the city had actively solicited from a local corporation to support a city science center
2. According to the GASB, “Financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting.” Financial resources are conventionally defined as “cash, investments, and receivables, and other assets that can be expected to be transformed into cash in the normal course of operations.” Included among the assets of governmental funds are supplies inventories and prepaid items, such as insurance and rent. Yet neither of these appear to meet the definition of financial resources. In your opinion, should these items be reported on the balance sheets of governmental funds? In light of the conventional definition of financial resources, how can including them be justified?
3. You are the auditor of a state. The state made a $10 million grant to a city. The grant reimburses the city for allowable costs incurred in hosting a meeting of international leaders. The meeting was held two weeks prior to the end of the state’s fiscal year, but as of the end of the fiscal year the city had not yet submitted documentation of any costs incurred. The state comptroller asserts that no amount of the grant should be reported as an expenditure of the current year in that the state has no reliable information as to the actual amount of allowable costs incurred and that are thereby eligible for reimbursement. Do you agree with the comptroller?
4. A city on the coast of Florida has incurred losses (including impairment of assets, clean‐up costs, additional public safety costs, etc.) of $50 million owing to a recent hurricane. This was the third time in as many years in which the city was hit by major storms. Should the losses be classified as “extraordinary”?

 

Sample Solution

In governmental accounting, the classification of items as “extraordinary” or “special” is governed by specific criteria outlined by the Governmental Accounting Standards Board (GASB). These classifications are intended to highlight events that are either unusual in nature or infrequent in occurrence (extraordinary) or significant items that are either unusual or infrequent and are within management’s control (special).

Let’s analyze the settlement of an age discrimination lawsuit (item a) in this context:

a. The settlement of an age discrimination lawsuit:

Analysis:

  • Unusual in Nature: While lawsuits against a city are not entirely uncommon, a significant settlement of an age discrimination lawsuit might be considered unusual depending on the city’s history and the specific circumstances of the case. However, it’s not inherently outside the normal course of a city’s operations to face legal challenges related to employment practices.
  • Infrequent in Occurrence: A material settlement of an age discrimination lawsuit might be infrequent for a particular city. However, given the complexities of employment law and the potential for such claims to arise over time, it’s debatable whether it meets the “infrequent” criterion in the strictest sense.

GASB Guidance:

According to GASB standards, extraordinary items are defined as transactions or other events that are both:

  1. Unusual in nature: The underlying event or transaction has a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the entity’s ordinary and typical activities.  
  2. Infrequent in occurrence: The underlying event or transaction is of a type that would not reasonably be expected to recur in the foreseeable future.  

Special items are defined as significant transactions or other events that are either:

  1. Unusual in nature or infrequent in occurrence (as defined above); and
  2. Within the control of management.

Conclusion for Item a:

The settlement of an age discrimination lawsuit is unlikely to qualify as an “extraordinary” item under GASB definitions. While it might be infrequent for a specific city or have some unusual aspects, it’s generally related to the city’s ordinary function of managing its workforce and is a risk inherent in being an employer. It’s difficult to argue that such a lawsuit is the type of event that would not reasonably be expected to recur in the foreseeable future for a large organization like a city.

Regarding classification as a “special” item, this is more subjective and depends on the specific circumstances and the city’s interpretation and application of materiality and management control.

  • It could be argued that the specific large settlement is infrequent.
  • However, demonstrating that the lawsuit itself or the factors leading to the settlement were within the direct control of management in a way that distinguishes it as “special” might be challenging. Management has influence over personnel policies and legal defense strategies, but the outcome of a lawsuit is often influenced by external factors (legal interpretations, court decisions, plaintiff’s case).

Therefore, while the settlement is a significant event that would be disclosed in the city’s financial statements, it would most likely be reported as a normal operating expense or expenditure rather than as an extraordinary or special item. The focus of these special classifications is typically on events that are truly outside the normal realm of operations and expectations.

For items b, c, and d, a similar analysis based on the definitions of extraordinary and special items under GASB would be required.

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