The Governmental Accounting Standards Board (GASB) issued an exposure draft on July 12 containing proposed guidance that would improve debt-related disclosures in notes to state and local government financial statements, including those addressing direct borrowings and direct placements.
Comments on the proposal are due by Sept. 15. The exposure draft contains instructions on how to submit comments to the GASB.
Under the proposed guidance, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements, the GASB intends to clarify which liabilities governments should include in their note disclosures related to debt. That includes direct borrowings (a government entering into a loan with a lender) and direct placements (a government issuing a debt security directly to an investor).
The proposal defines debt for purposes of disclosure in notes to financial statements as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contract is established.
For disclosure purposes, leases and trade accounts payable would be excluded from the proposed guidance, according to the GASB. The GASB issued new accounting and financial reporting rules pertaining to leases in June.
“Stakeholders have expressed concerns related to the potential risks of debt, including bank loans, other forms of direct borrowings, and private placements of bonds that may affect a government’s credit profile,” GASB Chairman David Vaudt said in a prepared statement.
To alleviate those concerns in part, the proposal would require that existing and proposed additional information in the notes present direct borrowings and direct placements of debt separately from other debt.
Other debt-related disclosures that would be required in notes to financial statements include:
• Unused lines of credit.
• Collateral pledged as security for the debt.
• Terms specified in debt agreements related to significant events of default with finance-related consequences and termination events with finance-related consequences.
• Subjective acceleration clauses.
The new requirements would improve financial reporting by giving essential information to users of financial statements that currently isn’t consistently provided, according to the GASB. In addition, information about resources to liquidate debt and the risks associated with changes in debt terms also would be disclosed.
Because of these provisions, users would better understand the effects of debt on a government’s future resource flows, the GASB stated.
The proposed guidance would amend:
• Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraph 119.
• Statement No. 38, Certain Financial Statement Note Disclosures, paragraphs 10 and 12.
• Interpretation No. 1, Demand Bonds Issued by State and Local Governmental Entities, paragraph 11.
• NCGA Interpretation 6, Notes to the Financial Statements Disclosure, paragraphs 4 and 5.
• Implementation Guide No. 2015-1, Question 7.85.7.
If approved, the proposal’s requirements would take effect for reporting periods beginning after June 15, 2018; earlier application would be encouraged.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.