In May 2017, the GASB issued Statement No. 86, Certain Debt Extinguishment Issues. Its purpose is to improve consistency in accounting and financial reporting for the extinguishment of debt that is defeased in substance, regardless of how cash and other monetary assets placed in an irrevocable trust for the purpose of extinguishing the debt was acquired.
GASB Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, requires that debt be considered defeased in substance when cash or other monetary assets acquired with refunding debt proceeds are placed irrevocably in a trust that will be used solely for satisfying scheduled payments of both principal and interest of the defeased debt. GASB Statement No. 86 establishes essentially the same requirements for when a government irrevocably places cash and other monetary assets acquired with only existing resources in a trust to extinguish the debt.
of Debt Using Only
For accounting and financial reporting purposes, debt will now be considered defeased in substance when the government irrevocably places cash and other monetary assets (that are essentially risk-free as to the amount, timing, and collection of interest and principal) using only existing resources that existed separate from the proceeds of refunding debt. The cash and other monetary assets are placed with an escrow agent in a trust to be used solely for satisfying scheduled payments of both interest and principal of the defeased debt, and it is at most a remote possibility that the government will need to make future payments. The monetary assets in the trust are required to provide cash flows that essentially match in timing and amount the scheduled interest and principal payments on the defeased debt.
Recognition and Disclosure
When a government places cash and other monetary assets using only existing resources with an escrow agent in a qualifying trust, the government should no longer report the debt as a liability in the financial statements using the economic resources measurement focus. Additionally, the combination of any difference between the reacquisition price and the net carrying value of the debt and any deferred outflows of resources or deferred inflows of resources from previous refundings should be recognized as a separately identified gain or loss in the period that the in-substance defeasance occurred.
For financial statements using the current financial resources measurement focus, any payments to the escrow agent that are made from existing resources should be reported as debt service expenditures.
When defeasing debt using only existing resources, a government should provide a general description of the transaction in the notes to the financial statements in the period of the defeasance that may include the following:
- Amount of the debt.
- Amount of cash and other monetary assets acquired with existing resources placed with the escrow agent.
- Reasons for the defeasance.
- Cash flows required for defeased debt service.
In the periods following the defeasance transaction, the government should disclose the outstanding amount of debt defeased in substance at period end. That amount may be combined with the amount of debt defeased in substance through other refunding transactions with outstanding amounts.
Prepaid Insurance Disclosure
The amount of any remaining prepaid insurance related to the extinguishment or in-substance defeasance of debt should be included in the net carrying amount of that debt for the purpose of calculating the difference between the reacquisition price and the net carrying amount of the extinguished debt.
Additional Disclosure Requirements for All In-substance Defeasance Transactions
GASB Statement No. 86 includes the following additional disclosure requirements for all in-substance defeasance transactions, regardless of how the cash or other monetary assets were acquired: A government should disclose in the period in which the debt is in-substance defeased that there is no prohibition against the future substitution of essentially risk-free monetary assets with monetary assets that are not essentially risk-free. In the periods following an in-substance defeasance, a government should disclose the amount of outstanding in-substance defeased debt for which the substitution discussed above is not prohibited. That amount should be disclosed separately from the remaining outstanding amount of debt defeased in substance.
GASB Statement No. 86 is effective for reporting periods beginning after June 15, 2017, with earlier application encouraged. Changes adopted to conform to the statement’s provisions should be applied retroactively by restating financial statements, if practicable, for all presented prior periods. If such restatement is not practicable, the cumulative effect, if any, of applying the statement’s provisions should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest restated period.