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. In some cases, governmental entities may be receiving funds from this settlement until 2040.
Audit Consideration #1 – How should my entity be recognizing the receipt of settlement funds?
At this point in time, many entities that are receiving these funds are considered “litigating parties” in that they were participating in the litigation with the drug companies. While many entities were not the ones suing the companies directly, local governments were able to join with states by signing a “memorandum of understanding” (MOU) or “memorandum of agreement” (MOA) with the state government that allowed the locals to participate in the litigation.
For litigating parties, the receipt of the opioid settlement funds is considered to be an exchange transaction, and consequently, entities should account for the receipt of these funds in the same way they would any other exchange transaction. GASB views these as exchange transactions because governments are receiving funds now in exchange for their agreement to release drugmakers and distributors from present and future litigation.
Therefore, to the extent that the amounts are known and measurable, entities should recognize a receivable and revenue related to opioid settlement funds that they will receive in financial statements using the economic resources measurement focus (accrual basis of accounting). If an entity is using a governmental fund to record these items (which will be the case for many entities), the entity will also need to consider the availability of these funds to determine if revenue or a deferred inflow of resources for unavailable revenue should be recognized on the modified accrual basis of accounting.
Finally, until these funds are spent, they are considered to have purpose restrictions – meaning, they are required to be used on certain activities. As a result, any unspent funds should be reported as restricted fund balance and/or net position.
Audit Consideration #2 – What if my entity is not a “litigating party” and received opioid settlement funds?
While not as prevalent at the moment, it is possible that an entity may receive opioid settlement funds in a grant-like transaction. If that is the case for your entity, it is not an exchange transaction and instead, you would account for it like you do any other grant.
