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GASB-86 Provides Helpful New Statement for State/Local Governments Looking to Repay Debt

December 14, 2017

Nikoleta D. McTigue, CPA, MSA

The Government Accounting Standards Board (GASB) recently issued a helpful new statement for state and local governments concerning debt repayment (called GASB Statement No. 86, or GASB-86). This statement—which took effect for fiscal years started after June 15, 2017—provides 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. It also improves accounting and financial reporting for prepaid insurance on debt that is extinguished and notes to financial statements for debt that is defeased in substance.

This new statement was born out of GASB determining that more guidance was needed for cities and towns dealing with resources that came from areas other than bond sales and proceeds, an area previously uncovered. This will not have an impact on accounting and reporting for assets acquired from refunded bonds, an area already covered by the GASB.

GASB-86 establishes the same requirements for in-substance defeasance of debt using only existing resources as previous GASB Statement No. 7 did, where the cash of other monetary assets acquired with refunding debt proceeds are placed in a trust to be used solely for the purpose of paid principal and interest. However, with GASB-86, governments should recognize 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 as a separately identified gain or loss in the period of the defeasance.

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. 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.

For governments that extinguish debt, whether through a legal extinguishment or through an in-substance defeasance, GASB-86 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.

By definition, a debt is considered defeased in substance if:

  1. Governments irrevocably place cash and other monetary assets acquired with only existing resources with an escrow agent in a trust.
  2. The trust is to be used solely for satisfying scheduled payments of both interest and principals of defeased debt.
  3. There is little possibility the government will be required to make future payments on the debt.

This should bring some much-needed consistency to state governments and municipalities looking to repay debt. According to information provided by GASB, the monetary assets placed in the trust must be risk-free for the purpose of timing and amount of payments, and must be in the same currency in which the debt is payable.

As governments continue to make strides to streamline their operations and find innovative ways to improve efficiencies in ways that benefit taxpayers, GASB-86 could prove to be valuable to those efforts. Instituting a set of uniform guidelines on debt repayment is certainly a measure that lends more clarity to a complex issue, and one which municipal and state leaders may soon be embracing. More detailed information about this new statement can be found here on the GASB website.

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