GASB has issued new guidance for state and local governments to use when extinguishing debt prior to its maturity.
GASB Statement No. 86, Certain Debt Extinguishment Issues, establishes accounting and financial reporting guidance for transactions in which cash and other monetary assets acquired with only existing resources – resources other than the proceeds of refunding debt – are placed in an irrevocable trust for the sole purpose of extinguishing debt.
Current GASB standards provide guidance on accounting for and reporting when cash and other monetary assets acquired with the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt.
The new guidance applies when only existing resources (other than bond proceeds) are placed in a trust in order to repay outstanding debt in the future.
When debt is defeased in substance, the debt, cash, and other monetary assets placed in trust are no longer reported in the financial statements. But governments are required to disclose information in the notes to the financial statements about debt that has been defeased in substance.
“Governments that defease debt using only existing resources should provide a general description of the transaction in the notes to financial statements in the period of the defeasance,” GASB said. “In all periods following an in-substance defeasance of debt using only existing resources, the amount of that debt that remains outstanding at period-end should be disclosed.”
Statement 86 also provides guidance relating to prepaid insurance on debt that is extinguished.
“For governments that extinguish debt, whether through a legal extinguishment or through an in-substance defeasance, this statement requires that any remaining prepaid insurance related to the extinguished debt 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 debt,” GASB said.
The requirements of Statement 86 go into effect for reporting periods beginning after June 15, 2017, with earlier application encouraged.