The Governmental Accounting Standards Board (GASB) issued one exposure draft (ED) in August that addresses Certain Debt Extinguishment Issues, and another in September that addressed a variety of technical issues, Omnibus 201X. This article will summarize the key proposals in both documents.The proposed guidance in both documents, if approved, would take effect for the fiscal year that ends June 30,2018.
Background. Governments sometimes desire to replace or eliminate outstanding debt prior to its call date or maturity. To do so, they must place sufficient resources into a trust (escrow) to cover the remaining debt service payments and ultimately redeem the debt at call date or maturity. Often the trust thus established legally assumes the government's status as primary obligor, leaving the government only contingently liable for the debt. In that case, the government ceases to report trust assets and related debt on its statement of net positon, just as though the debt had been repaid (legal defeasance). In other cases, however, the trust is not actually able to assume the government's legal status as primary obligor, even though the likelihood of the government making any future debt service payments is remote.
New Guidance on In-Substance Defeased Debt. GASB Statement No. 7 used the term in-substance defeasance to describe this latter situation and specifically directed that it be treated in the same manner as a legal defeasance (i.e., remove both trust assets and related debt from the government's statement of net position). However, the scope of GASB Statement No. 7 was specifically limited to situations where at least a portion of the resources placed in trust came from the issuance of refunding debt (advance refundings'). In practice, governments sometimes rely exclusively on existing resources to fund such a trust. The new ED essentially proposes that the guidance on in-substance defeasance provided in GASB statement No. 7 apply regardless of the source of the amounts placed in trust. Thus:
* The difference between the reacquisition price of the outstanding debt and its carrying value would be treated as a gain or loss and reported separately in accrual-basis financial statements; and
* The acquisition price would be treated as a debt service expenditure in governmental funds. (GASB Statement No. 7 prescribed that any portion of a refunding accomplished using existing resources be classified as an expenditure...