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GASB Aims to Improve Early Debt Extinguishment Reporting

Aug 30th 2016
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The Governmental Accounting Standards Board (GASB) proposed guidance on Aug. 29 that state and local governments would use when extinguishing debt prior to its maturity.

Specifically, the proposal is intended to improve consistency in accounting and financial reporting for transactions in which only existing resources are placed in a trust for the purpose of extinguishing debt.

Current GASB standards provide accounting and reporting guidance for when the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt. But the standards do not apply when only existing resources (other than bond proceeds) are placed in a trust in order to repay outstanding debt in the future.

The problem is, governments could account for what is essentially the same transaction in two different ways, according to the GASB.

The exposure draft, Certain Debt Extinguishment Issues, proposes to make accounting and financial reporting guidance more uniform for debt that is “defeased in substance,” regardless of the source of the resources that are placed in a trust.

In-substance defeasance refers to a situation in which the debt remains outstanding, but sufficient resources – in the form of essentially risk-free monetary assets – have been placed into an irrevocable trust to make payments on the debt when they come due.

When debt is defeased in substance, the debt and resources placed in trust are no longer reported in the financial statements. However, governments are required to disclose information in the notes to the financial statements about debt that has been defeased in substance.

“Whether you borrow the money to extinguish the debt or use cash you already have, the treatment ought to be the same because the economic substance of the transaction is the same,” GASB Chairman David Vaudt said in a written statement. “From a government’s perspective, the source of the money that is being used to refund debt should not matter as long as the requirements for in-substance defeasance are met.”

According to the proposal, “[a]ny difference between the reacquisition price (the amount required to be placed in the trust) and the net carrying amount of the debt defeased in substance using only existing resources would be recognized as a separately identified gain or loss in the period of the defeasance in financial statements using the economic resources measurement focus.”

In addition, governments that defease debt using only existing resources “would provide a general description of the transaction in the notes to the financial statements in the period of the defeasance,” the exposure draft states. “In all periods following an in-substance defeasance of debt using only existing resources, the amount of that debt that remains outstanding at period-end would be disclosed.”

Other guidance proposed in the exposure draft includes:

  • Any remaining prepaid insurance related to the extinguished debt would be required to be included in the net carrying amount of that debt for the purpose of calculating the difference between the reacquisition price and the net carrying amount of the debt.
  • Disclosure would be required if a government is not prohibited from subsequently exchanging the essentially risk-free monetary assets in the trust with monetary assets that are not essentially risk-free.

Comments on the proposal are due by Oct. 28 and should be emailed to [email protected].

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