The GASB releases an exposure draft on Monday that is designed to promote uniformity in state and local government accounting for eradicating debt early.
The exposure draft, Certain Debt Extinguishment Issues, is intended for transactions when only existing resources are placed in a trust for the purpose of getting rid of debt.
GASB standards currently provide guidance for accounting and reporting when the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt. However, those standards do not apply when only existing resources (other than bond proceeds) are placed in a trust to be used to repay outstanding debt in the future.
The proposal is designed to provide 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.
“In-substance defeasance” occurs when 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 a debt is defeased in substance, the debt and resources placed in trust are no longer reported in the financial statements. However, governments ae required to disclose information in the notes to the financial statements about debt that has been defeased in substance.
“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,” GASB Chairman David Vaudt said. “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 an in-substance defeasance are met.”
In addition, GASB is proposing guidance related 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 essential risk-free monetary assets in the trust with monetary assets that are not essentially risk-free.