Caught in the Middle: Issuer Accounting for Conduit Debt.

Author:Levine, Michele Mark
Position:The Accounting Angle

On May 13, 2019, the Governmental Accounting Standards Board (GASB) approved the issuance of GASB Statement No. 91, Conduit Debt Obligations, which replaces GASB Interpretation No. 2, Disclosure of Conduit Debt Obligations, as the source of generally accepted accounting principles (GAAP) for state and local governmental entities that issue conduit debt. The statement is effective for periods beginning after December 15, 2020, with early implementation encouraged. (1)

As the name implies, issuers in conduit debt transactions primarily serve as channels between lenders and the third parties (other governments and nonprofits such as colleges and hospitals are frequent beneficiaries) that receive the proceeds of loans and are primarily responsible for repaying them ("third-party obligors," or simply "obligors"). Because they can have virtually no "skin in the game," issuers do not report liabilities for the conduit debt itself. However, some issuers make commitments associated with their conduit debt that may result in their needing to report liabilities and related outflows to support some or all of the debt service payments. (2)

Additionally, some issuers enter into lease-like "associated arrangements" in which they hold legal title to assets that are purchased or constructed with the conduit debt proceeds and receive payments from the obligor for its use of that underlying asset. Associated arrangements usually cover the time period during which the conduit debt is outstanding and, depending on the specifics of the agreements, they may or may not result in issuers recognizing the underlying assets and related inflows.

To be classified as conduit debt, debt must meet five criteria:

  1. There must be at least three parties --an issuer, an obligor, and a debt holder or trustee--to the transaction. There may be more than one obligor or debt holder/trustee in a single conduit debt transaction.

  2. The issuer and the obligor may not be in the same reporting entity; therefore, a primary government and a component unit, or two component units of the same primary government, may not be parties to a conduit debt transaction.

  3. The debt cannot be a parity bond (one with equal rights to collateral as other bonds issued under a common indenture) or be cross-collateralized with other debt of the issuer.

  4. The obligor or its agent must ultimately receive the proceeds of the debt.

  5. The obligor must be primarily responsible for repayment of the debt. (3)


    All issuers of conduit debt make certain limited commitments, such as to protect the tax-exempt status of the debt. Depending on the specifics of the debt agreement, they may also agree to receive funds from the obligor and make payments to debt holders or trustees. However, issuers sometimes make other commitments that can obligate them or otherwise result in their...

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