United States

GASB issues Exposure Draft on certain debt extinguishment issues


Currently, Governmental Accounting Standards Board (GASB) Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, requires that debt be considered defeased in substance if the debtor irrevocably places refunding debt proceeds with an escrow agent in a trust to be used solely for satisfying scheduled payments of both principal and interest of the defeased debt. The trust also is required to meet certain conditions for the transaction to qualify as an in-substance defeasance. A recently issued Exposure Draft, Certain Debt Extinguishment Issues, would establish essentially the same requirements if a government places only existing resources in a trust to extinguish the debt.

Per the Exposure Draft, any difference between the reacquisition price (the amount required to be placed in the trust) and the net carrying amount of the debt defeased in substance using only existing resources would be recognized as a separately identified gain or loss in the period of the defeasance in financial statements using the economic resources measurement focus. Governments that defease debt using only existing resources would be required to provide a general description of the transaction in the notes to the financial statements in the period of the defeasance. 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 would be required to be disclosed.

For governments that extinguish debt, whether through a legal extinguishment or through an in-substance defeasance, the proposed Statement would require 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.

The requirements of the proposed Statement would be effective for reporting periods beginning after June 15, 2017. The Exposure Draft is available for comment until October 28, 2016.