United States

Loan costs no longer an asset under GASB 65


The Governmental Accounting Standards Board's Statement No. 65 Items Previously Reported as Assets and Liabilities (GASB 65), will go into effect for financial statements for periods beginning after Dec.15, 2012, with earlier adoption encouraged. GASB 65 was issued to clarify the appropriate reporting of deferred outflows and inflows of resources to ensure consistency in financial reporting.

Loan costs

Guidance of particular interest to tribal gaming operations is discussed in paragraphs 14 and 15 of GASB 65. This guidance relates to how loan costs should be accounted and is as follows:

14. Paragraph 187 of Statement 62 establishes standards of accounting and financial reporting for debt issuance costs. Paragraph 12 of Statement 7 indicates that debt issuance costs include all costs incurred to issue the bonds, including but not limited to insurance costs (net of rebates from the old debt, if any), financing costs (such as rating agency fees), and other related costs (such as printing, legal, administrative, and trustee expenses).

15. Debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred. Prepaid insurance costs should be reported as an asset and recognized as an expense in a systematic and rational manner over the duration of the related debt.

A tribal gaming operation can incur significant costs when obtaining debt financing. Prior to the issuance of GASB 65, the loan costs incurred were recorded as assets and expensed over the life of the related debt. Upon the adoption of GASB 65, loan costs will be expensed when incurred.

A complicating factor is that if it is practicable, all financial statements presented will need to be restated to adopt the guidance of GASB 65. For illustration purposes, assume the reporting entity has a December 31 year-end and GASB 65 is adopted in the year ending Dec. 31, 2013. In 2013 and all future years all loan costs will be expensed as incurred. Any financial statements for years prior to 2013 that are presented with the 2013 financial statements will need to be restated to reflect the expensing of the loan costs when they were incurred. If restatement is not practicable, the cumulative effect of applying this statement should be reported as a restatement of beginning net position for the earliest period restated.

If loan costs are significant, the adoption of this statement will significantly decrease net position. In addition, the change in the increase or decrease in net position of prior year financial statements that have been restated as described above could be significant. The restatements of net position and changes in net position should raise the following questions:

  • What effect do the restatements have on the tribal gaming organization’s compliance with loan covenants?
  • Do the changes affect any amounts owed under compacts with the state?
  • Do the changes affect any amounts owed under management contracts?

The changing of the accounting for loan costs will not only change the presentation in the financial statements but depending on the answers to the above questions could also have an effect on the cash flow of the gaming operation.

Refundings of Debt

Refundings of debt refers to the satisfaction and elimination of old debt by replacing it with debt under a new agreement. When the refunding occurs, a calculation is made of the difference between the carrying value of the old debt and the amount required to repay the old debt.

Prior to GASB 65 the accounting for loan costs and refundings of debt were very similar in that both were amortized over a period of time that was based on the term of the related debt. Upon the adoption of GASB 65, loan costs are expensed but the calculated amount of the gain or loss from the refunding will now be called a deferred outflow of resources or a deferred inflow of resources, depending on whether the old debt is more or less than the amount required to repay the old debt. The deferred outflow or inflow of resources will be recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.