Certain Debt Extinguishment Issues
In August 2016, the GASB issued an Exposure Draft (ED) of a proposed statement, Certain Debt Extinguishment Issues, in an effort to increase consistency in accounting and financial reporting for certain debt extinguishments. The ED specifically addresses those early extinguishments where only existing resources are used and placed into a trust to repay the debt, and provides guidance on any prepaid insurance related to the extinguished debt. There is also an additional disclosure requirement in the ED regarding debt that has been defeased in substance.
What does defeased in substance mean? Relative to this ED, it describes the circumstance where existing debt actually remains outstanding, but the governmental entity has placed existing resources into an irrevocable trust, to repay, or extinguish, the debt when it becomes due. When debt is defeased in substance, neither the debt nor the funds in the trust are reported in the financial statements. The government is, however, required to disclose in the notes to the financial statements the fact that such debt has been defeased and disclose certain other related information.
The current standards give guidance on how governments are to account for and report when using the proceeds of refunding bonds and placing those funds into a trust for the repayment of outstanding debt in the future. The current standards do not apply when a government places existing funds, instead of refunding bond proceeds, in a trust to repay outstanding debt in the future. Therefore, governments can, and are, accounting for what is basically the same transaction in two different ways.
The GASB believes that it should not matter whether a government borrows the funds or uses existing funds to repay the debt; the accounting should be the same, as the substance of the transaction is the same.
The exposure draft proposes the government recognize as a separately identified gain or loss in the period of the defeasance the difference between the reacquisition price and the net carrying amount of the debt defeased in substance when only existing resources are used using the economic resources measurement focus.
The ED also proposes governments disclose, in the period of the defeasement when using only existing resources, a description of the transaction in the notes to the financial statements. For periods following the in-substance defeasement using only existing resources, the ED proposes governments disclose the total amount of debt defeased in substance that is still outstanding at the period end.
The ED also provides guidance on prepaid insurance on debt that is extinguished, by requiring governments to include the amount of any remaining prepaid insurance in the net carrying amount for the purpose of calculating the difference between the reacquisition price and the net carrying amount.
Finally, governments will be required to disclose if they are not prohibited from exchanging the essentially risk-free monetary assets in the trust with monetary assets that are not essentially risk-free.
The ED contains a proposed effective date for periods beginning after June 15, 2007, with earlier implementation encouraged.
In September 2016, the GASB issued an omnibus ED. Omnibus standards are issued when application and implementation issues are noted as a result of previously issued GASB Statements. These standards typically clarify a wide range of topics that are generally insignificant in nature.
The proposed changes in the September ED are primarily related to GASBS No. 61, The Financial Reporting Entity; GASBS No. 69, Government Combinations and Disposals of Government Operations; GASB No. 72, Fair Value Measurement and Application; and the recently issued pension and other postemployment benefits (OPEB) standards. The following list summarizes the topics amended and clarified in the ED.
- Component Unit Blending.Single column business-type activity primary governments may only blend a component unit if it meets the requirements for blending in GASBS No. 14, paragraph 53, as amended. (The intent of the changes in GASBS No. 61 was not to provide the option of blending any component unit.)
- Goodwill.Governments should reclassify negative equity that existed prior to the effective date of GASBS No. 69 to a deferred outflow of resources in the period of adoption in accordance with GASBS No. 69, paragraph 39.
- Investments.Real estate used in the operations of insurance entities should be classified, by unit of account, as either an investment or capital asset in accordance with the definition of an investment in GASBS No. 72, paragraph 64. In addition, governments (that are not external investment pools) may continue to report money market investments and participating interest-earning investment contracts at amortized cost if they have a remaining maturity of one year or less at time of purchase.
- Pension and OPEB.The ED addresses various matters related to pension and OPEB plans. See the ED for detailed discussions of the following topics:
- Timing of the measurement of liabilities and expenditures in financial statements using the current financial resources measurement focus.
- On-behalf payments in employer financial statements.
- Measurement of payroll in required supplementary information (RSI) for both plans and employer financial statements.
- Classification of OPEB employer-paid member contributions.
- OPEB alternative measurement method.
- Recognition, measurement, RSI, and notes to financial statements and RSI of certain cost-sharing OPEB plans.
The effective date in the ED is years beginning after June 15, 2017, with early application encouraged. The ED proposes retroactive application, including 10-year RSI schedules, unless it’s not practicable.