GASB PROPOSES GUIDANCE FOR DEBT THAT IS
EXTINGUISHED EARLY USING ONLY EXISTING
RESOURCES
Norwalk, CT, August 29, 2016—The
Governmental Accounting Standards Board (GASB) today proposed guidance that
state and local governments would apply when extinguishing debt prior to its
maturity. Specifically, the Exposure Draft, Certain Debt Extinguishment
Issues, proposes guidance for transactions in which only existing resources
are placed in a trust for the purpose of extinguishing debt.
Current GASB
standards provide guidance on how to account for and report when the proceeds of
refunding bonds are placed in a trust for the future repayment of outstanding
debt. However, the standards do not apply when only existing resources (in other
words, other than bond proceeds) are placed in a trust for the future repayment
of outstanding debt. Consequently, governments could account for what is
essentially the same transaction in two different ways.
The Exposure
Draft proposes uniform accounting and financial reporting guidance for debt that
is “defeased in substance,” regardless of the source of the resources that are
placed in a trust.
“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,” said GASB Chair David A.
Vaudt. “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.”
In this context, 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 the resources placed
in trust are no longer reported in the financial statements. Governments are
required, however, to disclose information in the notes to the financial
statements about debt that has been defeased in substance.
The Exposure
Draft also proposes guidance relating to prepaid insurance on debt that is
extinguished and notes to the financial statements for certain defeased debt.
One proposal would require disclosure 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.
The Exposure
Draft is available on the GASB website, http://www.gasb.org/. Stakeholders are
encouraged to review and provide comments by October 28,
2016.
About the Governmental Accounting Standards
Board
Established in 1984, the GASB is the independent,
private-sector organization based in Norwalk, Connecticut, that establishes
accounting and financial reporting standards for U.S. state and local
governments that follow Generally Accepted Accounting Principles (GAAP). These
standards are recognized as authoritative by state and local governments, state
Boards of Accountancy, and the American Institute of CPAs (AICPA). The GASB
develops and issues accounting standards through a transparent and inclusive
process intended to promote financial reporting that provides useful information
to taxpayers, public officials, investors, and others who use financial reports.
The Financial Accounting Foundation (FAF) supports and oversees the GASB. For
more information, visit http://www.gasb.org/.