GASB issues final statement on bankruptcies: the provisions of GASB Statement No. 58 will first take effect for the fiscal year that ends on June 30, 2010.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Governmental Accounting Standards Board

In December 2009, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies. The provisions of the new pronouncements will first take effect for the fiscal year that ends on June 30, 2010.

BACKGROUND AND SCOPE

Chapter 9 of the U.S. Bankruptcy Code allows local governments to file for bankruptcy if they are unable to pay their obligations as they come due. This option is available to local governments only if permitted by applicable state law, as is now the case in 24 states. GASB Statement No. 58 provides guidance on how filing for bankruptcy under Chapter 9 should be reflected in the filing government's financial statements, including the accompanying notes.

The provisions of GASB Statement No. 58 apply only to governments that have actually filed .for protection under Chapter 9. GASB Statement No. 58 does not apply to governments that are just considering that possibility, no matter how seriously. It also does not apply to debt relief obtained in a context other than a Chapter 9 bankruptcy (troubled debt restructurings).

It is important to distinguish the recognition and measurement provisions of GASB Statement No. 58 from its note disclosure requirements. The latter take effect immediately upon filing for bankruptcy under Chapter 9, whereas the former do not take effect until a court-approved plan of adjustment is in place.

MEASUREMENT AND RECOGNITION

A court-approved plan of adjustment modifies the terms of a government's debt obligations. Sometimes the modification involves the reduction or elimination of recognized liabilities (principal and accrued interest payable). At other times, the modification takes the form of a reduced rate of interest. In still other cases, the modification may be expressed as a reduction in total future debt service payments, without specifying whether it is the principal, interest, or some combination of the two, that is being reduced. GASB Statement No. 58 offers the following guidance for each of these situations:

* Reduction or Elimination of Recognized Liabilities. If the court-approved plan of adjustment reduces a recognized liability (debt, accrued interest on debt), the reduction is to be treated as an extraordinary gain.

* Reduced Rate of Interest.

Reducing the rate of interest on debt avoids a future liability rather than reducing an existing one, meaning there is no gain to report.

* Reduction in Total Future...