All 100 North Carolina counties and 17 municipalities received opioid settlement funds as a result of the legal settlement with several corporate parties. There are likely more settlements to come as well as the possibility of some corporate parties declaring bankruptcy, which may affect the amount of total settlement payments.
We issued Memorandum 2023-03 that discussed the compliance and auditing aspects surrounding these funds but we continue to get questions on the accounting piece.
GFOA has published a short video reviewing the different types of funds that the states and local government units (LGUs) received and the differences in the accounting treatment for each. You can find that video here.
As noted in the video, there is a difference in how an LGU accounts for the funds, depending on the source of the funds. Approximately 85% of the funds currently available were distributed directly to local governments. The remaining 15% was distributed to the states or used to cover administrative costs. While there is a possibility of funds being distributed in the future from the State of NC to LGUs, all funds received by LGUs to date have come directly from the settlement. As a result, the transaction is an exchange transaction. These LGUs “exchanged” the right to pursue further litigation against the pharmaceutical companies for the settlement funds. These funds are restricted as to use – they have purpose restrictions on them.
To recognize the revenue associated with these funds under full accrual accounting, they have to be measurable, earned, and material. Measurable also includes collectible; keep in mind that some of the companies may cease making payments at some point in the future for various reasons. LGUs should consider some level of offset. The funds were earned at the point the LGUs entered into the settlement agreement. Finally, units should consider not only quantitative materiality but qualitative materiality – are these funds serving an important purpose in the LGU? Because there are purpose restrictions on the funds, any unspent funds should be shown as restricted net assets.
To recognize the revenue associated with these funds under modified accrual accounting, they have to be measurable, available, and material. Measurability and materiality should be considered in the same manner as for full accrual. Availability will be an issue under modified accrual; unavailable funds should be recorded as deferred inflows and recognized as they become available. Because there are purpose restrictions on the funds, any unspent available funds should be shown as restricted fund balance.
If you have further questions please contact us at (919) 814-4300 or SLGFD@nctreasurer.com
